On Tuesday, December 18, 2012 at 10:00 a.m. pacific/12:00 p.m. central, Jim McNairy, Jessica Mendelson and Joshua Salinas will present the “2012 California Year in Review,” the final segment in this year’s Trade Secret Webinar Series. 

You can register for this complimentary webinar here.

In Seyfarth’s final installment of its 2012 Trade Secret Webinar series, Seyfarth attorneys will review noteworthy California cases and other legal developments in the increasingly hot areas of trade secret protection, the preemptive effect of the California Uniform Trade Secrets Act, California’s hostility to non-competition and non-solicitation agreements, the continued erosion of the Computer Fraud and Abuse Act as a tool for California employers to curb data theft, and social media’s influence on how organizations identify and protect confidential information. The Seyfarth panel will specifically address the following topics:

• The several reasons that trade secret law remains hot in California

• The continued influence of trade secret preemption and how it shapes the ways those doing business in California identify and protect their confidential and proprietary information

• How California’s prohibition against non-compete agreements continues to gain steam, including potential strategies for protecting proprietary information given the realities of California’s increasingly highly mobile workforce

• The continued erosion of the Computer Fraud and Abuse Act as a tool for California employers to curb data theft, including potential strategies for protecting proprietary information stored on computer systems

• How the rise of social media and the National Labor Relation Board’s increased scrutiny of employer social media policies further raises the importance of identifying and protecting trade secrets and highlights the open question of whether California employers properly may restrict by policy and/or contract employees’ disclosure and use of confidential information that does not rise to the level of trade secret

• California’s new social media law, AB 1844, and other California-specific limitations on employers’ abilities to regulate and discipline employees concerning their use of social media

The panel will address, among others, the following 2012 cases: PhoneDog, LLC v. Kravitz; FormFactor, Inc. v. Micro-Probe, Inc.; Wanke, Industrial, Commercial, Residential, Inc. v. Sup. Ct.; Fillpoint, LLC v. Maas; Zynga, Inc. v. Kixeye, Inc.; and United States v. Nosal.

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

By Jessica Mendelson and Joshua Salinas

We previously blogged about the case of PhoneDog v. Kravitz, a Northern District of California case that called into question the ownership of Twitter followers on an employee’s professional account following the employee’s departure from the company. After over a year and a half of litigation, the parties have finally reached a settlement agreement.

Noah Kravitz, a former employee of PhoneDog, an “interactive mobile news and reviews website” was sued by his former employer, which claimed Kravitz unlawfully continued to use PhoneDog’s Twitter account following his departure from the company. At the time of Kravitz’s departure in October 2010, the twitter account had 23,000 followers. As of today, the account has more than 27,000 Twitter followers. Kravitz claims he took the Twitter account with the website’s blessing. Phone Dog, however, sued Kravitz, demanding compensation for the Twitter followers Kravitz acquired through his employment with the company. This lawsuit was the “first to put a price tag on the worth of a Twitter user,” (i.e. $2.50 per follower) and tackled the question of “who owns a professional Twitter account started during a period of employment.”

The terms of the settlement are confidential, yet the parties have confirmed Kravitz will maintain sole custody of the Twitter account at issue. Additionally, the settlement will resolve all legal claims between the parties. “I’m very glad to have worked this out between us,” Kravitz said in a statement. “If anything good has come of this, I hope it’s that other employers and employees can recognize the importance of social media … good contracts and specific work agreements are important, and the responsibility for constructing them lies with both parties.”

As Kravitz suggests, the case highlights the importance of clearly establishing ownership of social media before problems arise. Employers who make use of social media accounts should create contractual agreements that clearly state who owns these accounts.  (See e.g. Ardis Health, LLC, Curb Your Cravings, LLC and USA Herbals, LLC v. Ashleigh Nankivell, 2011 WL 4965172 (S.D.N.Y. Oct. 19, 2011) (awarding injunctive relief and ordering former employee to return social media passwords to employer who had written ownership agreement).  In the long run, creating such contracts can be significantly cheaper than the litigation that could ensue without such an agreement. This is especially true given the questionable value of Twitter followers, who can be “fickle [and] unpredictable.” Although there is clearly a value in having such followers, legal experts, such as Eric Goldman, question whether it is really worth the cost of litigation in the case of such disputes, or whether the parties should simply create new accounts.

Legal experts advise that one way to avoid such disputes is to require employees to agree “that the company, not the employee, owns the account and that employees must return all social media logins and passwords at end of employment.” This can be done through a written ownership agreement that explicitly lays out expectations about whether the account is meant for business or personal use. This is especially true given that “social media accounts often mix the personal and the professional, so from a practical standpoint making a clean break may not be possible.” Please also see John Marsh’s Trade Secret Litigator blog for a nice summary of the cases in this space.

Such agreements should be customized based on the employer’s planned use of social media accounts for their specific business. Additionally, having such an agreement in place allows employees to create separate personal accounts if they so desire, which may prevent them from facing a situation similar to that faced by Kravitz. Finally, employers should also incorporate into such agreements that the employee agrees to return the passwords to the accounts upon the termination of their employment.  Employers should be cautious, however, in wording such agreements in light of recent laws designed to protect employees’ personal social media accounts.

By Robert Milligan and Grace Chuchla

There are not many issues that the United States Supreme Court can unanimously resolve in five short pages.

The preeminence of the Federal Arbitration Act (“FAA”) is apparently one such issue, as the Supreme Court recently illustrated in its November 26 per curium opinion in Nitro-Lift Technologies LLC v. Howard, 568 U.S. __ (November 26, 2012).

In the decision, the Supreme Court reaffirmed the FAA’s national policy in favor of arbitration and emphatically shot down an attempt by the Oklahoma Supreme Court to exert judicial review over the enforceability of a non-compete agreement that contained a mandatory arbitration provision.

This dispute arose when Eddie Lee Howard and Shane D. Schneider left Nitro-Lift Technologies (“Nitro-Lift”) and began working for one of Nitro-Lift’s direct competitors in Arkansas. Upon learning of Howard and Schneider’s new employment, Nitro-Lift served them with a demand for arbitration in an effort to enforce the non-competition agreements that both had signed at the outset of their employment. These agreements contained a clause that required arbitration in Houston, Texas of all disputes arising under the agreement and for the application of Louisiana law. However, despite this arbitration clause, Howard and Schneider responded to Nitro-Lift’s demand for arbitration by filing suit in the District Court of Johnson County, Oklahoma and asking the court to enjoin the enforcement of their non-competition agreements as contrary to Oklahoma state law.

The district court dismissed Howard and Schneider’s complaint because the arbitration clause demanded that an arbitrator, rather than the court, settle such disputes. However, plaintiffs appealed to the Oklahoma Supreme Court, which not only accepted the appeal but also ordered the parties to demonstrate why Okla. Stat., Tit. 15, §219A should not be the deciding factor in this dispute over the enforceability of a non-competition agreement.   The Oklahoma Supreme Court held that: 1) in conformance with its prior jurisprudence, the existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement; 2) as drafted, the non-competition covenants are void and unenforceable as against Oklahoma’s public policy expressed by the Legislature’s enactment of Okla. Stat., Tit. 15, §219A; and 3) judicial modification of the covenant not to compete is inappropriate where, as here, the contractual provisions would have to be substantially excised, leaving only a shell of the original agreement, and would require the addition of at least one material term. For an in-depth look at what the Oklahoma Supreme Court said in its November 2011 opinion, see our previous post.

In a nutshell, the US Supreme Court was not pleased with the Oklahoma Supreme Court’s attempt to circumvent and weaken the FAA and the disregard that it showed toward Supreme Court precedent. Despite the Oklahoma court’s claim that it had conducted an “exhaustive review of US Supreme Court decisions construing the Federal Arbitration Act,” the Supreme Court flatly rejected the argument that its previous decisions did “not…inhibit [Oklahoma’s] review of the underlying contract’s validity” (slip op. at 3).

Under its controlling authority, the US Supreme Court ruled that an arbitrator must decide whether the non-compete agreement was valid. The Court stated that “it is a mainstay of the [FAA’s] substantive law that attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved by the arbitrator in the first instance, not by a federal court.” 

Additionally, the Court took issue with the Oklahoma Supreme Court’s claim that its “decision rests on adequate and independent state grounds” (slip op. at 3). Rather, as the Supreme Court saw it, Oklahoma’s reasoning “necessarily depended upon a rejection of the federal claim” and controlling federal laws and precedents (slip op. at 3). Thanks to the all-important Supremacy Clause of the US Constitution, such a rejection cannot stand. Thus, per the Supreme Court’s previous decisions in cases such as Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), Preston v. Ferrer, 522 U.S. 346 (2008), and Prima Paint Corp. v. Flood & Conklin Mfg, Co., 388 U.S. 395 (1967), the question of whether or not Howard and Schneider’s non-competition agreements are enforceable under §219A is not a proper question for a state court to answer. In short, although the validity of an arbitration agreement is subject to a court’s review, “the validity of the remainder of the contract (if the arbitration provision is valid) is for the arbitrator to decide” (slip op. at 4).

Coming on the heels of AT&T Mobility v. Concepcion, 563 US __ (2011), this opinion is yet another clear affirmation of the US Supreme Court’s desire to bolster the power of the FAA. Especially notable in this case is the fact that the non-competition agreement in question was, as we discussed in our previous post, unenforceable under Oklahoma state law. Nevertheless, the Supreme Court still chose to remove the question of the agreement’s enforceability from the hands of the state court and turn it over to an arbitrator – a clear demonstration of the high court’s desire to maintain the process of arbitration even in the face of a legal question with an all but perhaps foregone conclusion at least under Oklahoma law. Query though whether an arbitrator in Texas, where the arbitration is to be conducted pursuant to the agreement, may have a different view of the enforceability of the non-competition provisions and may question the application of Oklahoma law where the agreement specifies the application of Louisiana law. Finally, employers and employees alike should note that there is nothing in this opinion that alters the status of non-competition agreements under Okla. Stat., Tit. 15, §219A. Such agreements still remain generally unenforceable, although such a question will now often be for an arbitrator to decide if an employer’s utilizes arbitration agreements.

As far as takeways from this decision, employers should carefully consider whether disputes with employees concerning non-compete/trade secrets issues should be resolved through the courts or arbitration and draft their agreements accordingly. Some legal commentators such as John Marsh believe that the arbitration of non-compete/trade secret disputes in the employment context should rarely be handled by arbitration and that employers should include carve outs for such disputes if they generally employ arbitration agreements with their employees. Please also see Ken Vanko’s informative summary of the case. In our experience some of the reasons why the courts may be preferably for such disputes include the ability to obtain injunctive relief more expeditiously as well as the appearance of authority and finality of a court order, rather than an arbitrator’s order. A word of caution on the use of such exclusions, however, as at least in California, some courts have pointed to such exclusions in arbitration agreements as purported evidence of unconscionability to invalidate such  agreements. Notwithstanding those decisions, a California federal court recently ruled that the use of such an exclusion was not unconscionable.  

Accordingly, the utilization of arbitration agreements, coupled with forum selection, choice of law, and consent to jurisdiction provisions, specifying an employer’s pro non-compete forum, with employees from jurisdictions that limit or prohibit non-compete agreements may provide some employers with additional options that they did not otherwise consider, notwithstanding the drawbacks discussed above. Such a strategy is not without risk, however, as employees can always attempt to challenge such provisions in their home forum on several grounds, including unconscionability, adhesion, or lack of reasonableness under forum selection standards, but the scope of such challenge may be limited by this decision, the United States Supreme Court’s other recent pro arbitration decisions, as well as future Supreme Court decisions.

By Joshua Salinas and Jessica Mendelson

The secret is out, Tic Tacs and bubblegum have the most valuable and desirable real estate in the entire grocery store.

On September 27, 2012, a district court for the Eastern District of New York granted in part and denied in part a motion to dismiss in a commercial dispute arising out of the home of these consumables–grocery checkout displays. Dorset Industries, Inc. v. Unified Groceries, Inc, 2012 WL 4470423 (E.D.N.Y. Sept. 27, 2012).

The dispute arose when the defendant, inter alia, allegedly misappropriated the plaintiff’s trade secrets and confidential information to allegedly create a competing business program that marketed checkout areas, which also allegedly “cut out” the plaintiff from their alleged exclusive business arrangement.

Plaintiff Dorset Industries develops and implements “checkout programs,” which allegedly allow grocers to maximize their sales opportunities by utilizing the front end of checkout areas. These areas are believed to be the most desirable real estate in the store as the volume of foot traffic is unmatched. To capitalize on this valuable marketing opportunity, Dorset allegedly uses its “knowhow, experience, and intellectual property” to design and manufacture display units for the grocers, and accordingly leases space in those displays to manufacturers of grocery products (e.g. candy, magazines, and health and beauty products).

Defendant Unified Groceries is allegedly one of the largest retailer-owned grocery cooperatives, and allegedly the largest wholesale grocery distributor in the Western United States. Unified allegedly signed agreements with Dorset to implement Dorset’s checkout programs. Under the alleged agreements, Unified would be responsible for finding retail grocers within its member stores to sign up for Dorset’s checkout program; Dorset would be exclusively responsible for providing the displays and leasing the spaces out to manufacturers. Both parties would share in the resulting income stream.

Unified also signed confidentiality and non-disclosure agreements that restricted the use and disclosure of any business information provided by Dorset concerning the business methods and procedures of its checkout programs.

A dispute arose when Unified allegedly attempted to circumvent the parties’ business arrangement by creating its own checkout program and dealing directly with the manufacturers to lease the checkout display space. Consequently, Unified was allegedly able to “cut out” the intermediary (i.e. Dorset) and contract with the manufacturers directly–thereby obtaining 100% of the income stream. Unified also allegedly notified Dorset that it was terminating their program agreements, although the timing and sufficiency of that notification was disputed.

Dorset sued Unified in New York state court, alleging breach of contract, breach of the confidentiality agreement, usurpation of corporate opportunity, and unfair competition. Dorset also sought a declaratory judgment that the agreement’s termination was invalid. Unified subsequently removed the case to the Eastern District of New York and filed a motion to dismiss the entire lawsuit pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.

The significance of this case concerns the Court’s analysis of the third cause of action–breach of confidentiality and non-disclosure provisions. Unified contended that (1) Dorset failed to identify any confidential information allegedly used by Unified in creating its competing checkout program, (2) any such information was not confidential, and (3) Dorset failed to adequately allege that Unified misappropriated any confidential information. The Court disagreed.

The Court recognized that under New York law, a combination of characteristics and components in the public domain could be a protectable trade secret when uniquely combined into a unified process or product. The Court found that Dorset had set forth facts plausibly alleging that the information allegedly utilized by Unified constituted confidential information and/or trade secrets when Dorset identified this information as “checkout counter programs and its business model, plan-o-grams and designs, methods and procedures … including creating and designing the specific Program for Unified.”

Additionally, the Court found that Dorset adequately alleged that it took reasonable efforts to guard the secrecy of its trade secret, confidential, and proprietary information because Dorset alleged that it (i) restricted access to certain information within the company, (ii) utilized passwords to protect its computer system, (iii) limited remote access to those with authority, and (iv) limited access to certain documents containing confidential information within the company. The Court also underlined Dorset’s use of confidentiality and non-disclosure agreements, which defined such confidential and proprietary information and which also contained several express restrictive covenants, including specific covenants of non-disclosure of trade secrets and confidential and proprietary information.

The Court emphatically rejected Unified’s argument that Dorset’s complaint required a greater level of specificity at the pleading stage.

This case is also noteworthy considering the fact that Dorset allegedly admitted that it does not even know whether Unified had actually used or disclosed any confidential information, or whether it was merely speculating that it might do so at some unspecific future date. Unified contended that, at most, Dorset had alleged that Unified misappropriated a single form used for entering into agreements with vendors, and that the form did not constitute trade secret or confidential information because it was a one page five line form that contained nothing more than basic contact information.

The Court explained that it could plausibly infer that the confidentiality provisions were violated by Unified when it allegedly created its competing checkout program. Specifically, the court reasoned that (1) the form supported the inference that Unified created a checkout program that utilized the same methods and procedures as the Dorset program, (2) Unified had previously admitted to Dorset its intent to take over Dorset’s program after observing it for several years, and (3) the subsequent decline of customers that signed up for Dorset’s program compared to previous years implied that Unified began enrolling customers into its competing program. Thus, the Court found a reasonable inference from Dorset’s allegations that Unified had created a checkout display program that would replicated the allegedly confidential “methods or procedures” used in operating Dorset’s program.

Accordingly, the court denied Unified’s motion to dismiss as to Dorset’s claim for breach of confidentiality and non-disclosure provisions. The court also granted Unified’s motion to dismiss on the unfair competition and usurpation of opportunities claims, and granted in part and denied in part the claims for declaratory judgment and breach of implied covenant of good faith and fair dealing.

This case reminds us of the importance of non-disclosure and confidentiality agreements when conducting business with third parties. The existence of these agreements is often the deciding factor when analyzing whether the trade secret holder took reasonable efforts to maintain and protect the secrecy of the information. This case also reiterates that allegations for misappropriation of trade secrets and confidential information (at least in this Court) are not subject to a heightened level of specificity at the pleading stage. Indeed, as with other claims, the Court accepted as true the factual allegations set forth in the complaint and drew all reasonable inferences in the plaintiff’s favor. As illustrated in this case, a plaintiff that lacks direct evidence of misappropriation of trade secrets or confidential information should plead all corresponding facts that support a plausible inference that misappropriation occurred.

Last week, the United States Senate unanimously approved the Theft of Trade Secrets Clarification Act (“the TTSCA”). The TTSCA, which was co-authored by Senator Patrick Leahy of Vermont and Senator Herbert Kohl of Wisconsin, was introduced as S.3462 in order to strengthen the Economic Espionage Act of 1996 (“the EEA”). To achieve this goal, the TTSCA broadens federal law to ensure it addresses the theft of trade secrets related to a product or service used in interstate commerce.

Senators Leahy and Kohl decided to introduce the bill following the Second Circuit’s decision in the case of United States v. Aleynikov. In that case, the defendant allegedly stole software code from his former employer and took the code to his next employer in another state. At trial, Aleynikov was convicted of stealing trade secrets, however, on appeal, the Second Circuit interpreted the EEA narrowly, and found that the trade secrets relating to the source code Aleynikov had taken were not related to a product “produced for. . . interstate or foreign commerce,” and thus, were not entitled to protection.

The TTSCA seeks to strengthen the scope of the EEA to prevent results like the one in Aleynikov. Under the EEA, only trade secrets “related to or included in a product that is produced for or placed in interstate commerce” are protected. The Second Circuit interpreted this provision narrowly in Aleynikov, and found it only protected actual products intended to be placed in interstate commerce. Passing the TTSCA would expand the EEA to cover trade secrets “related to a product or service used in or intended for use in interstate or foreign commerce.” This would mean that the EEA would protect a broader range of trade secrets, including trade secrets with a relationship to a product or service intended for interstate use. Furthermore, the TTSCA would attempt to correct the Aleynikov loophole, and would mean that using a stolen product in interstate commerce is illegal. Please also see John Marsh’s informative blog on the new legislation, as well as Russell Beck’s blog entry.  

According to Senator Leahy, the legislation is “a straightforward fix, but an important one, as we work to ensure that American companies can protect the products they work so hard to develop, so they may continue to grow and thrive.” To become law, the TTSCA must also pass in the House of Representatives. The bill was referred to the House Committee on the Judiciary on November 28, 2012. We will continue to keep you apprised of future developments as the legislative process continues.

A hair salon’s motion for entry of a preliminary injunction against a stylist was denied even though she had signed non-competition, non-solicitation and confidentiality agreements with the salon, and immediately after leaving her prior employment she was employed by a nearby competitor, a fact noted on her Facebook page. Invidia LLC v Difonzo, Case No. MICV20123798H (Middlesex [Mass.] County Super. Court, Oct. 22, 2012).

The stylist, DiFonzo, worked at the Invidia salon for two years. At the outset of her employment, she signed a non-competition covenant that had two-year and ten-mile restrictions. Invidia claimed that she brought no clients of her own, and it stated that it gave her “education and training” which were “unprecedented in the salon industry.” When she resigned from Invidia, she immediately commenced employment by its competitor less than two miles away. Information concerning her new position was posted on her Facebook page. Although Invidia said her departure precipitated an “unprecedented . . . wave of no-shows, cancellations or non responses,” the salon could not demonstrate that she was responsible.

After Invidia’s attorney threatened to sue both DiFonzo and the competitor, she was laid off. In a conversation with the competitor’s owner, Invidia’s majority owner, Patzleiner, allegedly stated that Invidia simply “intended to send a message” to its employees and “did not care” whether DiFonzo solicited Invidia’s customers.

The Superior Court of Middlesex (Massachusetts) County declined to determine immediately whether the two-year and ten-mile restrictions were too broad to be enforceable. Rather, the court concluded that since Invidia demonstrated its ability to calculate with reasonable certainty the monetary loss it would sustain for each client DiFonzo takes, money damages should suffice to compensate Invidia if it prevails at trial. There was no evidence that DiFonzo breached her confidentiality covenant or solicited any Invidia customers. A few contacted her but, according to the court, “So long as they reached out to [her] and not vice versa, there is no violation of the non-solicitation provision.” Thus, even though Invidia was likely to succeed in proving that DiFonzo breached the non-competition covenant and that she may have the opportunity to compete in the future, the court denied Invidia’s motion for a preliminary injunction.

This decision stands for the proposition that a non-solicitation covenant is not violated by a Facebook post that merely informs readers of the ex-employee’s subsequent employment. Also, the ruling illustrates difficulties an employer faces in demonstrating immediately after an employee quits that the ex-employee’s conduct will inflict an irreparable injury. Invidia asserted, understandably, that it had good reasons not to interview its clients and bring DiFonzo’s departure to their attention. Yet, without evidence that she solicited them or used confidential information, Invidia could not show that the harm it faced absent an injunction outweighed the harm to her if she was rendered unemployable for an extended period.

By Joshua Salinas and Grace Chuchla

The fight over an employer’s attempt to enforce arbitration agreements in the face of wage and hour class action claims is a common one in the world of labor and employment law. In fact, this is the very question that a federal district court for the Eastern District of California recently considered in Steele, et. al v. American Mortgage Solutions d/b/a Pinnacle, 2012 WL 5349511 (E.D. Cal., Oct. 26, 2012). Finding for the employer, the court, in its October 26th order, granted the defendant’s motion to compel arbitration and dismissed the plaintiff’s class action claims without prejudice. However, in doing so, the court also provided noteworthy analysis regarding the relationship between arbitration agreements and a company’s efforts to protect its trade secrets, making this order a must-read for both trade secret litigators and those involved with wage and hour class actions and involved in drafting arbitration agreements.

Background Facts

The facts in this case are fairly straightforward. Pinnacle is a Pasadena, California based company that provides maintenance services and personnel. As a prerequisite to employment, Pinnacle required its employees to sign a binding arbitration agreement. Like most arbitration agreements, this agreement covered nearly all claims that could arise between Pinnacle and its employees and required that any disputes be settled “exclusively by final and binding arbitration before a neutral Arbitrator.” Plaintiffs, all of whom signed such an agreement, brought suit under various California and federal laws alleging that Pinnacle required them to work more than forty hours a week without providing timely overtime compensation. After receiving the Complaint, defendant’s attorney sent a letter to opposing counsel stating that Plaintiffs were bound by arbitration agreements. Plaintiffs, however, did not withdraw their complaint, and Pinnacle subsequently filed a motion to compel arbitration.

The court’s analysis of Pinnacle’s arbitration agreement first looks to the agreement’s scope and then to its procedural and substantive conscionability.

Scope of the Agreement

The scope of the agreement does not cause the court concern; citing to various cases interpreting the Federal Arbitration Act (“FAA”), the court found that “the plain language of the Agreement covers plaintiff’s claims in this case, all of which have been held to be subject to arbitration under the FAA.” Additionally, the court dismissed plaintiffs’ arguments that California wage and hour claims are exempt from the FAA. As the court saw it, plaintiffs’ reliance on Gentry v. Superior Court, 42 Cal. 4th 443 (2007), and Hoover v. American Income Life Insurance, 206 Cal. App. 4th 1193 (2012), was for naught, as these cases were “either overruled or inapplicable” to plaintiffs’ claims.

Procedural and Substantive Unconscionability

Under California law, both procedural and substantive unconscionability are required for an arbitration agreement to be enforceable and both elements are analyzed under a sliding-scale test. Plaintiffs in this case received their first win with the court’s finding that the lack of an opt-out clause rendered the arbitration agreement procedurally unconscionable. However, the tables turned back in Pinnacle’s favor with the court’s analysis of the agreement’s substantive unconscionability, which is also where the court’s analysis of trade secret claims and arbitration agreements lies.

When analyzing an arbitration agreement, courts evaluate the arbitration agreement’s individual provisions for substantive conscionability to ultimately determine whether the agreement is “wholly unenforceable.” In this case, suits seeking injunctive relief for unfair competition and/or disclosure of trade secrets received special attention because such suits are one the few types of claims that Pinnacle specifically excluded from mandatory arbitration under its agreement. As the court saw it, following the reasoning in Ting v. AT&T, 318 F. 2d 1126 (9th Cir. 2003), such exclusion raised the possibility of substantive unconscionability because it demonstrates a “stronger party…through a contract of adhesion, impos[ing] a forum on a weaker party without accepting the forum for itself.” Id. at 1149 (quoting Armendariz v. Foundation Health Psychcare Services, 24 Cal.4th at 118, 99 (2000). Additionally, the court cited Ferguson v. Countrywide Credit Industries, Inc., 298 F.3d 778 (9th Cir. 2002), which held that arbitration agreements that exclude claims that an employer is most likely to bring against an employee raise the suspicion of substantively unconscionable.

However, the key to the court’s analysis is one short word – “could.” Nowhere in its analysis does the court say that Pinnacle’s exclusion of trade secret claims from its arbitration agreement unquestionably renders it substantively unconscionable. In fact, after looking at various other aspects of the agreement, the court’s final conclusion is that nothing in Pinnacle’s arbitration agreement is substantively unconscionable. With respect to its exclusion of trade secret claims, there are “valid reasons, entirely independent from any intent to place the employees at a relative disadvantage or to generate one sided results, for excluding claims of unfair competition or trade secret violations from the mandatory arbitration agreement provisions of the Agreement.” More specifically, the court recognized that, given the three-party nature of trade secret claims, arbitration is not the correct forum for such suits. Employers forced to arbitrate trade secret misappropriation claims would be forced to arbitrate against their former employee and bring suit in court against the former employee’s current employer. Needless to say, such an arrangement would be a far cry from the Agreement’s intent to bring efficiency to legal proceedings and could negatively affect the rights of the third-party current employer.

The court ultimately granted Pinnacle’s motion to compel arbitration and to dismiss plaintiffs’ claims without prejudice, thereby denying plaintiffs class relief.

Takeaways

In short, this order may be  a powerful tool for employers who are concerned both with mitigating the potential for class action suits in court and with protecting their trade secrets. With respect to the exclusion of suits for injunctive relief for the misappropriation of trade secrets, the “could be substantively unconscionable” reasoning that one finds in Ting and Ferguson has swung in the “not substantively unconscionable” direction. Indeed, the arbitration agreement’s carve out of injunctive relief for trade secrets and unfair competition in this case is consistent with the Ninth Circuit’s interpretation of the FAA to allow injunctive relief in the court even in arbitrable disputes, and a similar exception under California’s Arbitration Act.

Pinnacle’s exclusion of trade secret claims has stood the test of the court, and a commonsense analysis of how trade secret claims actually play out in the real world has prevailed over what could have been an unforgiving scrutiny of Pinnacle’s exclusion of trade secret claims in the arbitration agreement.

According to a recent Arizona federal court decision, (a) an employee who had the right to access his employer’s confidential emails did not violate the federal Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030, by downloading 300 such documents to his personal computer and sharing them with a recently terminated employee; (b) an employer may pursue either a misappropriation claim under the Arizona Uniform Trade Secrets Act (AUTSA), or statutorily pre-empted causes of action based on the same facts; and (c) a rule to show cause is appropriate where the defendants violated a 48-hour deadline to return the employer’s confidential documents. Food Services of Amer. Inc. v. Carrington, No. CV-12-00175-PHX-GMS (D. Ariz., Nov. 8, 2012).

Because of the holding in U.S. v. Nosal, 676 F.3d 854, 863-64 (9th Cir. 2012), the Carrington case defendants cannot be sued in the Arizona federal court for a CFAA violation (of course, both individuals may be liable for non-CFAA causes of action). Nosal, which is binding on that court, held that an employee who was authorized to access the employer’s computerized records did not violate the CFAA by downloading and distributing them to unauthorized persons. Some other circuit courts of appeal decisions conflict with Nosal. See, e.g., several cases cited there — including International Airport Centers, L.L.C. v. Citrin, 440 F.3d 418, 420-21 (7th Cir. 2006) (breach of duty of loyalty terminates authorization to access employer’s computer data and, therefore, violates CFAA) — and criticized.

The AUTSA pre-empts all claims based on the same facts as the misappropriation cause of action (regardless of whether what was misappropriated was a trade secret or merely confidential information). However, according to the court in Carrington without citation of authority, pre-emption means that the employer must choose whether to sue for an AUTSA violation or for pre-empted claims. This holding is puzzling. Several cases hold that causes of action pre-empted by a uniform trade secrets act are abrogated. See, e.g., CDC Restoration & Constr. v. Tradesmen Contractors, LLC, 274 P.3d 317 (Utah App. 2012) (the “preemption provision [in a UTSA] has generally been interpreted to abolish all free-standing alternative causes of action for theft or misuse of confidential, proprietary or otherwise secret information”).

In response to their ex-employer’s motion for entry of a rule to show cause why the defendants should not be held in contempt for late production of the employer’s documents, the defendants asserted that they had located and produced the documents only a few months after expiration of the deadline for doing so. They professed to having committed a “relatively minor technical infraction” as a result of “a misunderstanding between counsel and defendants.” The court was unforgiving because the “defendants’ response fails entirely to comprehend the serious nature of violating a court order.” That ruling contains a loud and clear message concerning the potential adverse consequences to a party for failing to produce misappropriated confidential documents as ordered by a court, no matter how abbreviated the time allowed for doing so.

In sum, the Carrington decision should send shivers down the spine of a former employee who misappropriated his employer’s proprietary information. In some circuits the former employee may escape CFAA liability for misdeeds occurring before termination, but regardless he may be hit with an expensive lawsuit and a monetary judgment.

A high profile trade secret dispute among the board members of one of the fashion world’s most well-known companies has the American fashion elite taking sides. Last month, Christopher Burch filed a breach-of-contract and tortious interference complaint against his ex-wife, fashion mogul Tory Burch, in Delaware Chancery Court. In response, Tory filed counterclaims in early November, in which she accused Christopher of stealing trade secrets to establish stores which looked suspiciously like her own boutiques.

Tory Burch and her ex-husband, J. Christopher Burch, co-founded the fashion empire Tory Burch LLC in 2003. The company is an apparel and accessories brand providing consumers with luxury apparel and other goods. As Oprah Winfrey stated in 2005, the company is “the next big thing in fashion.” Today, the company’s annual sales total more than $700 million annually.

The Burches divorced in 2006, and both Tory and Christopher remained on the board of Tory Burch LLC. Christopher continued to pursue other projects, and in 2008, began to lay the groundwork to launch his own apparel brand, C.Wonder. The company opened its first store in October 2011. Its products included clothing, accessories, and home décor, all of which allegedly resembled Tory Burch’s products, but were sold at a significantly lower price. Allegedly, the store copied the Tory Burch brand, using similarly styled lacquered front doors and store fixtures, as well as furniture and rugs which closely resembled those found in the Tory Burch stores.

In June 2011, Christopher provided the Board of Directors (“the Board”) of Tory Burch LLC with notice that planned to sell his shares of the company. The Company then engaged Barclay’s Capital to assist in the process of locating a buyer. This project was referred to as “Project Amethyst.”

The events which followed the opening of C. Wonder vary depending on who is telling the story. Tory alleges the company sought to “arrive at a consensual resolution of its dispute” with Christopher, despite his violations of his fiduciary duties. In her counterclaim, she states the company continued to move forward with Project Amethyst to find a new investor to purchase Christopher’s stake in the company. In addition, five of the seven board of directors agreed that Christopher would need to enter into a settlement agreement to protect Tory Burch LLC’s brand and confidential information prior to completing any sale. According to Tory’s version of the story, the three bidders positioned to purchase Christopher’s required such an agreement to be in place before they would agree to invest, and Christopher’s refusal to agree prevented the sale from taking place. Christopher tells the story very differently, alleging Tory had cut off his power and “hijacked the bidding process” through which he had been attempting to sell his stake in the company. Furthermore, he alleges Tory manipulated third party bidders into requiring him and his company, C Wonder to reach a one-sided and onerous settlement agreement with the Company regarding trade secret misappropriation and trade dress infringement allegations.

On October 2, 2012, Christopher filed suit against Tory, the other directors, and Tory Burch LLC, requesting a declaratory judgment stating the defendants could not restrain him from pursuing other business ventures. Additionally, Christopher alleged the Board had breached the Operating Agreement by preventing him from engaging in other business ventures, tortiously interfered with his business relationships, and improperly interfered and acted in bad faith to impede his ability to sell his shares of the company.

On November 5, 2012, Tory filed counterclaims against Christopher, alleging Christopher had stolen trade secrets from Tory Burch LLC to establish stores which closely resembled Tory Burch boutiques. Tory alleged Christopher had stocked the stores with mass-market knock-offs of her luxury brand , and that under the terms of the operating agreement, he did not have the right to create knock-off goods, and his right to compete was qualified and limited by his other obligations as a director. Tory’s counterclaim alleges Christopher breached his fiduciary duty by using confidential information belonging to Tory Burch LLC and engaging in unfair competition for his personal benefit. Additionally, Christopher allegedly misappropriated trade secrets from Tory Burch LLC, which he then used in creating C Wonder. Tory’s counterclaim also alleges unfair competition, breach of contract, and deceptive trade practices. She further requests injunctive relief to stop Christopher’s use of Tory Burch LLC’s confidential information and company inventions.

Heavyweight fashion industry players like Anna Wintour and Diane Von Furstenburg have already spoken out in support of Tory Burch. According to Anna Wintour, the editor of Vogue, “As far as we’re concerned [this is] 100% Tory’s business, and we’ve never had anything to do with Chris.” Diane Von Furstenburg, the President of the Council of Fashion Designers of America, echoes Wintour’s support, characterizing Christopher’s behavior as “bizarre and nasty.”

The case is still in the early stages, but has already drawn attention for some colorful hearings. At the first scheduling hearing, which occurred on November 1, 2012, Chancellor Leo Strine promised not to burden anyone’s holidays with this “preppy clothing dispute. . . I’m sorry, but this is — this is not a case about intercontinental ballistic missiles.” In proposing an April trial date, Strine reflected on the popularity of “really ugly” duck shoes, “slightly irregular alligator shirts,” and how “real WASPS actually don’t go and pay full Polo price. . . at Macy’s. No way. They actually will find a bargain. That’s how they got to be, you know, WASPs.” Strine went so far as to suggest, jokingly, that the best way to evaluate the similarities between the C. Wonder and Tory Burch brands would be a fashion show featuring the parties’ attorneys. Finally, Strine discussed his recent reading of John Cheever’s works, and explained its impact on the dispute. “Totally unrelated to this case, I’ve been deep in it, in an autumnal Cheever phase. ” he said. “So I’ll have to just keep that up through the case. Have you read your Cheever lately? You know who he is? … And Mad Men will be coming back at some point in time. So I think if you read Cheever, go see the new Virginia Woolf revival and watch Mad Men, we’ll be all geared up and in the mood for this sort of drunken WASP fest. Are they WASPs? Are the Burches WASPs? Do we know?”

Whether Chancellor Strine’s preliminary views of this “preppy clothing dispute” lead to a quick resolution between the parties remains to be seen. We will continue to keep you apprised of future developments as the case progresses.

By Jessica Mendelson and Grace Chuchla

Employers in the Second Circuit are thankful for a recent non-compete summary order in which the Court found that an employee’s challenge of his non-compete agreement by way of a preliminary injunction motion failed because he failed to show irreparable injury.

Specifically, the Court found that an employee’s potential loss of income does not qualify as an irreparable injury in determining whether to invalidate a non-compete agreement and issue injunctive relief. In sum, in Hyde v. KLS Professional Advisors Group, the Second Circuit vacated a preliminary injunction issued by a New York federal district court, and in doing so, provided noteworthy insight on what constitutes irreparable injury with respect to the challenges by employees of non-compete agreements in the Second Circuit.

The facts in this case are fairly straightforward. Bruce Hyde (“Hyde”) resigned from KLS Professional Advisors Group (“KLS”), and he then filed suit and obtained a preliminary injunction preventing the enforcement of the restrictive covenants that Hyde had signed at the beginning of his employment with KLS. The covenants prohibited Hyde from contacting any of the firm’s past, present, or future clients for three years following his departure from KLS.

In reviewing the district court’s grant of a preliminary injunction, the Second Circuit reversed the preliminary injunction granted by the district court, finding that Hyde had clearly failed to show irreparable harm. According to the Second Circuit, irreparable harm was the “single most important prerequisite for the issuance of a preliminary injunction.” Fiaveley Transportation Malmo AB v. Wabtec Corp, 559 F.3d 110, 118 (2nd Cir. 2009).

According to the Court, prior to this case, the Second Circuit had yet to directly address the question of irreparable harm in the context of a challenge by an employee of his non-compete agreement. The reasoned, however, that in both the Supreme Court’s opinion in Sampson v. Murray, 415 US 61 (1974), and the Second Circuit’s opinion in Savage v. Gorski, 850 F.2d 64 (2d Cir. 1988), the courts denied requests for injunctions by government employees who had sought injunctions to keep or extend the jobs. Based on these cases, the Court reasoned, in what must have been a turkey of a decision for Hyde, that loss of employment and any difficulties arising therein do not constitute irreparable injury. Therefore, Hyde’s alleged showing that his restrictive covenant inhibited his ability to find a new job was insufficient to satisfy the irreparable harm requirement. The Court reasoned that “difficulty in obtaining a job is undoubtedly an injury, but it is not an irreparable one” as any harm suffered could be adequately compensated with monetary damages at trial.

Hyde also argued that his restrictive covenanst caused him irreparable harm through a loss of client relationships. The Court, however, quickly rejected that argument given that “Hyde had signed multiple agreements in which he acknowledged that KLS’s client base was proprietary and belonged to the firm.” Furthermore, even if the Court were to assume that Hyde had a legally protected interest in his client list, he had failed to demonstrate that losses related to his client list could not be remedied with monetary damages.

The Second Circuit’s ruling may be helpful to employers seeking to enforce non-compete agreements against their former employees and also provide them with helpful reasoning should former employees challenge their non-compete agreements.