In a recent ruling, a West Virginia federal judge held that litigation involving a former employee’s claimed violation of covenants not to compete and not to solicit the ex-employer’s workers must proceed to trial even though the ex-employer produced no evidence of monetary loss. Relying on 76-year old and 118-year old West Virginia cases neither of which concern similar covenants, the court reasoned that if the ex-employer proves a breach of contract, the company will be entitled at least to nominal damages and might be awarded attorneys’ fees and costs. The possibility that the plaintiff might recover damages was held to be a sufficient basis for denying the defendant’s motion for summary judgment. Panhandle Cleaning & Restoration, Inc. v. Vannest, Civil Ac. No. 5:11CV178 (Stamp) (N.D. W. Va., Oct. 5, 2012).

Panhandle constructs, restores and remodels residential and commercial buildings. It alleged that Golec, a former employee, breached an employment agreement promising not to compete within a 50-mile radius of his former place of business for two years after termination, and not to solicit Panhandle’s employees or customers during those two years. The agreement also recited that “The Employee expressly acknowledges that [the covenants not to compete and not to solicit are] reasonable and will not prevent [sic] or impose an undue hardship or otherwise prevent the Employee from earning a livelihood during the time it is in effect.” Golec denied that he had signed the agreement, and he insisted that, in any event, it was unenforceable.

According to the court, in addition to the issue of whether Golec’s signature was authentic, factual disputes included Panhandle’s claim that it had interests requiring protection, and Golec’s contention that enforcement would impose an undue hardship on him. Golec denied that he had solicited Panhandle’s employees, but the company identified witnesses who would testify to the contrary, and that was sufficient to defeat his summary judgment motion on Panhandle’s suit for breach of the non-solicitation covenant. Regarding the non-competition provision, the court cited cases holding that two-year and 50-mile restrictions are reasonable under West Virginia law. However, not determinable without a trial were “what exactly Panhandle’s business is and thus, what type of work constitutes being in direct competition with Panhandle.”

When the case goes to trial, the fact finder may sympathize with Golec at least with respect to the covenant not to compete. That sympathy may impact the decision as to whether the agreement is enforceable against him. Notwithstanding the employment agreement provision to the contrary, it is hard to believe that he posed a threat of substantial economic harm to Panhandle solely as a competitor. By the same token, enforcement of the non-compete would impose a hardship on him by depriving him for two years of virtually all opportunity to earn a living anywhere near Panhandle’s place of business — a 50-mile radius, after all, translates into a circle with a diameter of 100 miles — doing what he does best. The sympathy factor might be diluted, however, if Golec is found to have solicited Panhandle’s employees, and particularly if he refuses to promise that he will not attempt to solicit them for the remainder of the two-year period.

By Jessica Mendelson and Robert Milligan

Ownership of company social media accounts has recently become a hot topic in the legal industry, and with its decision in Eagle v. Morgan, 2012 WL 4739436, E.D.Pa., October 04, 2012 (NO. CIV.A. 11-4303) this past week, the Eastern District of Pennsylvania has added fuel to the fire.

Edcomm, a banking education company, was initially run by Dr. Linda Eagle. In 2010, Sawabeh Information Services Company (“SISCOM”) purchased the outstanding common shares of Edcomm. While she was president of the company, Dr. Eagle established an account on LinkedIn. Another employee assisted her in maintaining the account, which was used “to promote Edcomm’s banking education services; foster her reputation as a businesswoman; reconnect with family, friends, and colleagues, and build social and professional relationships.” Edcomm’s general, informal policy was that when an employee left the company, the company would, in effect, “own” the account, and could “mine” the incoming traffic and the information on the account, as long as its actions did not rise to the level of stealing an employee’s identity.

Eagle initially remained the CEO of the company, but was allegedly fired by the defendants in June 2011. Sandy Morgan was appointed interim CEO. Edcomm changed the password for Eagle’s LinkedIn account and replaced her name and photo with that of Sandy Morgan and blocked Eagle’s access to the account. Eagle initiated this lawsuit in July 2011. Defendant Edcomm counterclaimed, and in December 2011, this court dismissed Edcomm’s own CFAA claims against Eagle. For additional background, see our prior post on this case here. In July 2012, defendants filed a motion for summary judgment.

On October 4, 2012, the U.S. District Court for the Eastern District of Pennsylvania granted defendants’ motion for summary judgment on Eagle’s Computer Fraud and Abuse Act and Lanham Act claims. The court denied summary judgment with respect to the state claims asserted by Eagle.

The court dismissed the CFAA claim, finding Eagle had not shown a legally cognizable loss or damages suffered during the brief period in which she could not access her LinkedIn account. Eagle alleged she had missed out on professional opportunities because she lacked access to her account. However, according to the court, typically CFAA damages are limited to cases where a plaintiff lost money because her computer was inoperable or damaged, neither of which was the case here. Instead, Eagle alleged loss of potential business opportunities. According to the court, such speculative losses are “simply not compensable under the CFAA.” The court further objected to Eagle’s failure to quantify damages: Eagle provided “absolutely no evidence in support” of her damages claims.

In addition, the court dismissed the Lanham Act claim for failure to show a likelihood of confusion. Here, the defendants had switched the name and photo on the account, replacing Eagle’s name and image with that of Morgan. Although it may have diverted Eagle’s contacts, the defendants did not try to “pass off” Morgan as Eagle, nor did they suggest Eagle endorsed her in any capacity. As such, defendants’ actions would merely serve to divert Eagle’s contacts, rather than confuse them.

The court retained jurisdiction over Eagle’s state law claims. The case is scheduled to go to trial on October 16. Among the claims that will be addressed at that time are invasion of privacy by misappropriation of identity, tortious interference with contract, unauthorized use of name in violation of Pa. C.S. § 8316, misappropriation of publicity, identity theft under Pa. C.S. § 8316, conversion, civil conspiracy, and civil aiding and abetting. Ultimately, the court’s resolution of the conversion claim may resolve the ownership issue regarding the LinkedIn account.

This case is emblematic of significant controversies faced by the courts and the legislature with respect to social media. The courts have begun to grapple with issues such as whether social media accounts and followers can be owned, misappropriated, converted, transferred, or assigned, who may be liable when someone loses access to their social media accounts and followers, what damages are recoverable, and what is a personal social media account versus a company social media account. These issues have already arisen in cases such as Phone Dog, Christou v. Beatport, LLC and Piggy Paint, and will likely continue to arise in the future.

As social media disputes have become more prominent in the courts, the issues have become a hot topic in the state and federal legislatures. As of now, the current legislative debate on social media is primarily focused on prohibiting the turnover of user names and passwords for personal social media accounts by employees and prospective hires. California recently joined Maryland and Illinois in passing legislation prohibiting employers from requiring access to employees’ and prospective hires’ “personal” social media. “Personal” is not defined, however, in the California statute and “social media” has a very broad definition that may encompass any “personal” digital information. In the future, the larger issues are likely to focus on the extent to which companies can assert ownership interests in social media accounts, including the passwords, contacts, and other information contained in the accounts, defining the distinction between between personal and work accounts, and developing appropriate protections to ensure that company trade secrets and confidential information are not leaked on “personal” social media without invading privacy and other legal protections.

The takeaway message from this case is to be proactive and develop social media policies and agreements concerning these issues before the need actually arises. Agreements and policies should establish who owns the company social media account, and specify a procedure for returning login information upon termination. Employees should be reminded of the agreements and policies at the time of termination and employers should ensure that they obtain the relevant usernames and passwords. Additionally, the company should register or create the account, and change the password at the time of termination in order to avoid confusion. Agreements and control over the account are key in such disputes, as it speaks to who actually owns the account. Please also see Eric Goldman’s informative and insightful blog entry on this new decision.

We will continue to keep you apprised of future developments in this case and similar social media ownership/trade secret issues.

The Supreme Court of Ohio yesterday issued its decision on a motion to reconsider the Court’s opinion announced May 25, 2012 regarding an important non-compete issue.

In that earlier sharply divided ruling, the Court affirmed the appellate court’s holding that non-competition agreements entered into by a corporation and then transferred by operation of law to an L.L.C. into which the corporation merged were unenforceable by the L.L.C.  Acordia of Ohio, L.L.C. v. Fishel, 2012-Ohio-2297 (“Acordia I”).  The well-written and well-reasoned dissent cited a 1991 Ohio case which held that non-competes entered into with a sole proprietorship were enforceable by a successor corporation where there simply had been a change in the business structure.  Further, decisions in other states with facts indistinguishable from those in Acordia I hold contrary to that Ohio Supreme Court ruling.  Two months after Acordia I was announced, the Court granted Arcadia’s motion for reconsideration (“Acordia II”). 

Yesterday, by a 6-1 margin, the Supreme Court reversed the appellate court and remanded the case for a determination as to the reasonableness of the covenants not to compete (“Acordia III”).  The majority stressed in Acordia III that Acordia I was intended to hold that all assets transferred by constituent bodies by operation of law were enforceable by the surviving entity, except for covenants not to compete.   The ruling on reconsideration simply eliminated that exception.   Acordia of Ohio, L.L.C. v. Fishel, Slip Opin. No. 2012-Ohio-4648.

Acordia III not only clarifies the Court’s position regarding enforceability of non-competes but also relieves a lot of anxiety over the scope of Acordia I.  The petition for reconsideration expressed concern that the earlier ruling jeopardized the successor’s enforceability not only of non-competition covenants but also additional types of employment and other contracts transferred from a predecessor by operation of law.  Acordia III emphasizes that all contracts, if they are reasonable, may be enforced by the successor.  The law on these points in Ohio now clearly conforms with that of many other other jurisdictions.  For more details regarding this significant decision, the case history, and impact, please see John Marsh’s Trade Secret Litigator blog entry.

By Joshua Salinas and Robert Milligan

A California Court of Appeal recently reversed a trial court ruling that found a stipulated injunction preventing the solicitation of customers was invalid and unenforceable under California Business & Professions Code section 16000.

In Wanke, Industrial, Commercial, Residential, Inc. v. Sup. Ct., 2012 WL 4711888 (Cal.App. 4 Dist., October 4, 2012), the Court of Appeal held that since the trial court could not conclude, based on the language of the stipulated injunction, that it does not protect the plaintiff’s trade secrets, the court erred in concluding that it was an unlawful business restraint.

Facts

Plaintiff Wanke is a southern California company that installs waterproofing systems. Defendants Scott Keck and Jacob Bozarth are former employees of Wanke that left Wanke to start their own competing waterproofing company, WP Solutions.

Wanke brought action in late 2008 against Keck and Bozarth alleging that they misappropriated and misused Wanke’s trade secrets and confidential information, and used that information to actively target and recruit Wanke’s customers.

The parties ultimately resolved the action in 2009 by entering into a settlement and mutual general release agreement. Pursuant to the settlement agreement, Keck, Bozarth and WP Solutions agreed to a stipulated injunction, in which they would refrain from contacting or soliciting any customers listed on an agreed customer list for five years subject to certain exceptions. The stipulated injunction also provided for liquidated damages in the amount of $50,000 for initial violations of the order, with the amounts increasing in increments of $10,000 for each subsequent violation of the order, plus Wanke’s attorneys’ fees, costs, and expenses.

Proceedings to Enforce the Stipulated Injunction

A dispute arose the following year when the defendants allegedly contacted and/or supplied labor and materials to a customer on the prohibited customer list, Con Am Management. Wanke subsequently filed an application for an order to show cause requesting the trial court to hold the defendants in contempt for having violated the stipulated injunction. Wanke also filed a motion to enforce the settlement agreement related to Con Am Management and requested the court order defendants to pay liquidated damages as provided in the stipulated injunction.

The trial court held a combined trial/hearing on Wanke’s order to show cause for contempt and motion to enforce the settlement agreement. The trial ultimately court found that Wanke failed to establish the “existence of a lawful order,” which is required before a party may be held in contempt of that order.

Specifically, the trial court determined that the stipulated injunction was invalid to the extent it prohibited defendants from soliciting any entity merely because the entity appeared on the customer list attached to the stipulated injunction. Citing Business and Professions Code section 16600, the trial court viewed the stipulated injunction as a non-compete agreement, which could only prohibit customer solicitation if the employee was utilizing trade secret information to solicit those customers.

The trial court found that the identity and location of Con Am Management was easily identifiable and thus, not a trade secret. To avoid striking down the injunction in its entirety, and thereby unwind the entire settlement and resolution between the parties, the trial court narrowed the application of the injunction only to the extent it was used to prohibit defendants from undertaking or proposing to undertake jobs from customers on the customer list while defendants were employed by Wanke. The trial court explained that only on these jobs can defendants be said to be using information they learned while employed at Wanke to identify customers with particular needs or characteristics that would be protectable under California law.

With respect to the motion to enforce the settlement agreement, the trial court ruled that no liquidated damages may be imposed because the alleged violations were not in fact violations of the stipulated injunction as interpreted above by the court. Notwithstanding, the trial court awarded Wanke attorneys’ fees on the motion to enforce the settlement agreement because it obtained a declaratory judgment regarding the scope and enforceability of the stipulated injunction.

A few months later, Wanke filed second motion to enforce the stipulated injunction with respect to a different customer identified in the customer list, AV Builders. This time, the trial court found the defendants violated the stipulated injunction because the AV Builders work involved jobs undertaken or proposed to be undertaken when defendants were employed by Wanke. The trial court awarded Wanke its attorneys’ fees, along with $50,000 in liquidated damages as provided in the settlement agreement.

Court of Appeal

Both parties appealed. Defendants appealed the trial court’s findings that they violated the stipulated injunction as to AV Builders and the award of attorneys’ fees to Wanke regarding the motion to enforce the settlement as to Con Am Management. Wanke appealed the trial court’s order denying its motion to enforce the settlement as to defendants’ work for Con Am Management. Additionally, Wanke filed a petition for writ of mandate challenging the trial court’s order which refused to hold Keck and WP Solutions in contempt for violating the stipulated injunction. Wanke requested the Court of Appeal to enforce the entirety of the settlement agreement and stipulated injunction. Wanke also asked the appellate court to annul the trial court’s order discharging the OSC for contempt and direct the trial court to hold Keck and WP Solutions in contempt.

A. Contempt Ruling

With respect to the contempt issue, the Court of Appeal concluded that the double jeopardy clause of the Fifth Amendment to the federal constitution precluded the court from reviewing the trial court’s acquittal of Keck and WP Solutions on the contempt charges. Wanke argued that double jeopardy did not apply because the government did not prosecute the action. The Court found that there was no language in the binding U.S. Supreme Court decision of United States v. Dixon that limited application of the clause to the contempt proceeding here, which it characterized as a nonsummary criminal contempt proceeding, rather than civil contempt proceeding.

B. Validity of Stipulated Injunction Ruling

Notwithstanding its conclusion on the contempt issue, the Court then analyzed whether the trial court erred in determining the stipulated injunction was invalid and unenforceable. The Court reasoned that a party may successfully defend against the enforcement of an injunction that the trial court issued in excess of jurisdiction. The court, however, found that party may not defend against enforcement of a court order by contending merely that the order is legally erroneous. The Court reasoned that under existing authority an injunctive order enforcing an invalid contract, the invalidity of which is not apparent on its face, is not an injunction issued in excess of jurisdiction.

The Court then reasoned that the courts have repeatedly held a former employee may be barred from soliciting existing customers to redirect their business away from the former employer and to the employee’s new business if the employee is utilizing trade secret information to solicit those customers. The Court also discussed Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, in which the court concluded that there was substantial evidence to support the trial court’s finding that the employer’s customer list constituted a protectable trade secret. And as a result, the Morlife court concluded that the trial court had not erred in enjoining former employees from soliciting any business from any entity that did business with Morlife before the former employees stopped working there, provided they obtained knowledge about the customer during the course of their employment at Morlife. The Court also reasoned that under the California Supreme Court’s decision in Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937, section 16600 generally prohibits the enforcement of nonsolictiation agreements in all cases in which the trade secret exception does not apply. The Court also noted that there was a dispute among California appellate courts as to whether such an exception actually exists.

The Court held that Keck and WP failed to make a showing against the enforcement of the injunction on the ground that the injunction was beyond the trial court’s jurisdiction to issue. The Court reasoned that at the time the trial court issued the injunction it had personal and subject matter jurisdiction over the parties. It was also undisputed that Wanke had filed a lawsuit alleging trade secret misappropriation and had requested an order enjoining Keck and WP Solutions from soliciting its customers and the trial court entered the stipulated injunction as part of final resolution of the case. According to the Court, each of these fact supported the validity of the stipulated injunction.

The Court also noted that Keck and WP Solutions did not claim that the Stipulated Injunction was obtained in an unauthorized manner or in violation of statutory procedures. Further, there was nothing on the face of the stipulated injunction that indicated that it was unconstitutional or that it violated a statute. On the contrary, the Court noted that Keck and WP Solutions had conceded that employee non-competition agreements could be enforceable to protect the former employer’s confidential trade secret information and that the misuse of trade secret information may be properly enjoined by agreement. The Court highlighted the fact that defendants failed to oppose the existence of the so called “trade secret exception” to California’s prohibition on the enforcement of non-compete agreements.

The Court held that, because the stipulated injunction was valid to the extent that it protects Wanke’s trade secrets, and one cannot conclude from the face of the stipulated injunction that it does not protect Wanke’s trade secrets, the stipulated injunction was facially valid. The court remarked that even assuming that Keck and WP Solutions could demonstrate that the trial court erred in issuing the stipulated injunction because the customer list attached to the stipulated injunction was not a protected trade secret, such a showing would be insufficient to avoid enforcement of the injunction. That is because the Court reasoned that demonstrating that the trial court erred in issuing the injunction would not be sufficient to demonstrate that it acted in “excess of its jurisdiction” in doing so.

Finally, the Court recognized that common sense and fundamental fairness support its ruling. The Court explained that parties cannot stipulate to injunctions that identify certain customers whom they will not solicit in order to resolve claims that they misappropriated trade secrets, then proceed to violate the injunction and claim that the customer list is not a trade secret. Even assuming that Keck and WP Solutions were permitted to collaterally attack the validity of the stipulated injunction, and that they could prove that the customer list attached to the stipulated injunction was not a trade secret, the Court found that they made no such factual showing in this case.

In short, since the trial court could not conclude, based on the language of the stipulated injunction, that it does not protect Wanke’s trade secrets, the court erred in concluding that the stipulated injunction was an unlawful business restraint.

The defendants’ two claims in their appeal both failed in light of the Court’s conclusion that the trial court erred in determining that the stipulated injunction could not be enforced as drafted.

Takeaways

This case reminds us that California’s general prohibition on noncompetition agreements applies to all agreements that restrain anyone’s engagement in a lawful profession, trade, or business (unless there is an applicable exception); not merely agreements in the employer-employee context. Indeed, even settlement agreements and stipulated injunctions as part of the resolution of a lawsuit are within the ambit of Business and Professions Code section 16600.

While this case does not foreclose the ability to obtain injunctive relief when the settlement agreement and stipulated injunction contain restrictive covenants, it illustrates the difficulties in obtaining relief if the other side enters the agreement in bad faith. Thus, it is important to include language in any settlement agreement, which also contains restrictive covenants, and stipulated injunction references and stipulated findings as to the existence of trade secrets and how and why the agreement and/or injunction is necessary to protect trade secrets.

This case demonstrates that one possibility to increase the effectiveness of a settlement agreement, containing restrictive covenants, is to include a liquidated damages clause for any violations. Another possibility would be to require that money be placed in an escrow account for the life of the restricted period. While these remedies will not guarantee a party will not violate the terms of the agreement or ensure further injunctive relief, they may provide some relief for any damages suffered from a breach.

The case also demonstrates that the California appellate courts are presently split on whether there is a trade secret exception to Business and Professions Code section 16600, which may ultimately necessitate the California Supreme Court’s guidance.

This case is significant as it provides insight for parties that are assessing the enforceability of restrictive covenants contained within settlement agreements, stipulated injunctions, and other agreements. Specifically, parties may attack such agreements on the grounds of the lack of trade secrets and/or language that the restrictive covenants are necessary to protect trade secrets. At least in the case, however, the Court placed some stock in the parties’ agreed resolution to dissuade future collateral attack of the parties’ agreed language. What is clear, however, based on this decision is that non-solicitation of customers provisions that are unnecessary to protect trade secrets or not otherwise subject to an applicable exception are void and unenforceable.

By Joshua Salinas and Jessica Mendelson

A Florida District Court of Appeal recently confirmed that plaintiffs in trade secret misappropriation cases must identify their trade secrets with reasonably particularity before conducting discovery. AAR Mfg., Inc. v. Matrix Composites, Inc., No. 5D11–3802, 2012 WL 3870419 (Fla.App. 5 Dist., 2012). The Court of Appeal, however, rejected the notion that, as a threshold matter, the plaintiff was also required to prove the existence of its trade secrets.

Plaintiff Matrix Composites, Inc., manufactures and designs carbon fiber composites for the aviation, medical, and space industries. For example, these critical composite structures are used in F22 fighter jets and are extremely useful for stealth and weight reduction.  (Also check out this great video from Matrix’s website about the use of composites in fighter jets).

The case arose when Matrix sued a competitor, AAR Manufacturing, in Florida state court alleging misappropriation of trade secrets pertaining to various product molding processes.

During discovery, Matrix requested certain documents from AAR pertaining to AAR’s trade secrets. AAR filed a motion for a protective order to prevent the discovery of its own trade secrets on grounds that discovery could not continue until Matrix first identified its own trade secrets with reasonable particularity. The trial court denied AAR’s motion for the protective order, finding Matrix had identified its own trade secrets with reasonable particularity. Accordingly, the trial court ordered AAR to produce the requested discovery documents to Matrix within sixty days.

AAR petitioned the District Court of Appeal of Florida, Fifth Circuit for relief from the order denying its motion for the protective order. In particular, AAR argued that the trial court failed to make a “threshold finding” that Matrix’s allegedly misappropriated trade secrets actually existed before ordering AAR to disclose its own trade secrets.

The Court of Appeal denied AAR’s petition in part. The court recognized that, in trade secret misappropriation cases, a plaintiff is required to identify its trade secrets with reasonable particularly before proceeding with discovery. (See Del Monte Fresh Produce Co. v. Dole Food Co., 148 F.Supp.2d 1322 (SD. Fla. 2001).

The Court of Appeal, however, rejected the notion that the trial court was required to make a “threshold finding” regarding the existence of trade secrets in misappropriation. Specifically, the Court of Appeal rejected any “threshold finding” requirement that may derived from the recent Revello case. (See Revello Medical Management, Inc. v. Med-Data Infotech USA, Inc. 50 S.3d 678, 679 Fla. 2d DCA 2010) (stating that prior to proceeding with discovery in trade secret cases, “[t]he plaintiff must, as a threshold matter, establish that the trade secret exists”).

This case is significant because the Florida Court of Appeal has set the record straight with respect to the pre-discovery requirements for trade secrets misappropriation cases. Florida does not have a pre-discovery trade secret identification statute (see e.g. California Code of Civil Procedure § 2019.210), but this procedure is well established through Florida case law. It appears that the 2010 Revello case overly expanded these pre-discovery requirements to add a threshold finding that trade secrets exist. The Court of Appeal used the instant decision to eliminate any further confusion regarding pre-discovery trade secret identification.

Please join Seyfarth Shaw on October 10, 2012 for an informative breakfast briefing entitled Trade Secrets, IP and Your Employees as we discuss the following topics:

•Analysis of Real-World Situations Where Former Employees Have Attempted To Loot The Company’s Employees and Confidential Information and Take Them to a Competitor

•New Options Available With Noncompetition Agreements

•Methods to Protect Confidential Information and Intellectual Property

•How to Respond When Employees Leave or Take Trade Secret Information

The breakfast briefing will take place from 8:00 a.m. to 10:30 a.m. c.s.t. at the Hilton Americas in Houston.

You can register here for the complimentary breakfast briefing.

On September 19, 2012, Senators Amy Klobuchar (D-MN) and John Hoeven (R-ND) introduced the “Cloud Computing Act of 2012.”  The bill is a bipartisan effort to amend the Computer Fraud and Abuse Act (“CFAA”). If the bill passes, it would purportedly provide greater civil and criminal protections under the CFAA against unlawful computer activites related to cloud computing than currently exist. The introduction of the bill was delayed until this year after Senator Orrin Hatch (R-Utah) withdrew his support for the original bill in mid-2011.

Cloud computing was defined in the previous press statement involving Klobuchar’s bill as the “use of remote data centers to take over the task of computing from the personal computer.” Social media websites commonly use such cloud computing, and more recently, businesses have increased utilizing it to increase productivity and lower IT costs.

Under the terms of the proposed legislation, federal agencies would be required to publish periodic reports about their progress in shifting computer infrastructures toward cloud computing. Additionally, federal agencies would have to comply with the Office of Management and Budget’s (“OMB”) Federal Cloud Computing Strategy, and submit periodic reports to the OMB and the Office of Electronic Government and Information Technology about their compliance efforts. These reports would also require a “three year forecast of the plans of the agency relating to the procurement of cloud computing services and support relating to such services.”

The bill definines “cloud computing service” as “a service that enables convenient on demand network access to a shared pool of configurable computing resources (including networks, servers, storage, applications and services) that can be rapidly provisioned and released with minimal management effort or interaction by the provider of the service.”  This definition comports with that of the National Institute of Standards and Technology’s definition of the term. Similarly, a cloud computing account is defined as “information stored on a cloud computing service that requires a password or similar information to access and is attributable to an individual.” Under this definition, a single user can have multiple cloud computing accounts.

Passage of the bill would amend the CFAA to provide an additional, separate offense or claim for unauthorized access of a cloud computing account. Essentially, accessing a cloud computing account without authorization or in excess of authorization would become a criminal offense and as well as provide civil liability.  Specifically under the bill  “if the protected computer is part of a cloud computing service, each instance of unauthorized access of a cloud computing account, access in excess of authorization of a cloud computing account, or attempt or conspiracy to access a cloud computing account without authorization or in excess of authorization shall constitute a separate offense.” 

According to a press statement, Klobuchar previously indicated under the existing terms of the CFAA, if a cloud service has millions of individual accounts, and a hacker were to take a few dollars from each, the hacker cannot be prosecuted for a felony because the law addresses the individual attacks, and not the aggregate effect. According to the press statement, such security breaches can cost the public up to $1 trillion annually.

The bill provides for presumed loss. Specifically, it provides “[i]f an offense under this section involves a protected computer that is part of a cloud computing service, the value of the loss of the use of the protected computer for purposes of subsection (a)(4), the value of the information obtained for purposes of subsection (c)(2)(B)(iii), and the value of the aggregated loss for purposes of subsection (c)(4)(A)(i)(I) shall be the greater of–(1) the value of the loss of use, information, or aggregated loss to 1 or more persons; or (2) the product obtained by multiplying the number of cloud computing accounts accessed by $500.”

Critics of the bill argue that it defines cloud computing too broadly. Legal critics have criticized the bill’s definition of cloud computing, calling it incoherent and “co-extensive with the Internet generally.” The Cloud Computing Act of 2012 applies to a protected computer which acts as part of a cloud computing service. The phrase “protected computer” is defined broadly by the CFAA to include any computer “used in or affecting interstate. . . commerce or communication.” Critics argue that under this definition, every computer connected to the internet would constitute a “protected computer” since such computers can be used to access websites involved in interstate commerce.

The bill has also been criticized for its failure to add “meaningful protection” to the already confusing CFAA. Opponents suggest it is unclear “what problem this bill purports to solve” and question whether there have been cases where “the CFAA underprotected a cloud computing service or this legislation would have changed the outcome.” They argue the bill simply increases the CFAA’s complexity without much benefit, and the proper fix for the CFAA would be to “reduce the law’s length, organize it better, and reduce its implications for user’s ordinary Internet activity.” Others argue that the proper approach is to allow for voluntary methods, rather than legislation.

The bill, presently in committee, has a long road to travel in order to become law. We will continue to keep you apprised of future developments with this bill, as well as other legislation pertaining to the CFAA.

By James Yu

Apparently it’s not just the sweet, delicious taste of Magnolia Bakery cupcakes that had people lining up in droves for a box or three since it opened its first store in Greenwich Village, New York over 15 years ago.

According to a Complaint filed on September 20, 2012 by Magnolia, entitled Magnolia Intellectual Property, LLC v. Buba Trawally, et al., Civ. A. No. 12-7102, in the U.S. District Court for the Southern District of New York, the cupcakes are also distinguishable and highly valued because of their “unique, distinctive, and immediately recognizable look — the ‘Magnolia Signature Swirl’ icing topping.” Magnolia maintains as trade secrets its cupcake recipes, including the Signature Swirl, which it claims has become well recognized and associated with the Magnolia name. According to articles attached as exhibits to the Complaint, it takes anywhere from 8 to 40 hours of training to perfect the Signature Swirl. It should come as no surprise, therefore, that the company requires each of its bakers to sign confidentiality agreements to protect its trade secrets, as well as other proprietary and confidential information.

The Complaint alleges that one of Magnolia’s former bakers, while still employed with Magnolia, started a company called Apple Café Bakery Corporation, then opened up a competing retail bakery shop in Greenwich Village shortly after he left Magnolia’s employ. According to the Complaint, Apple Cafe Bakery created “Knock-Off Cupcakes” with the same swirled icing topping “in an attempt to capitalize upon Magnolia’s unique and distinctive Magnolia Signature Swirl Trade Dress.” The Complaint also accuses the defendants of misappropriating Magnolia’s cupcake recipes. The Complaint asserts a total of eight causes of action, including federal and state statutory trade dress infringement, trade dress dilution, breach of contract, trade secret misappropriation, unfair competition, and tortious interference. Defendants have not yet responded to the Complaint.

While the Complaint seeks permanent injunctive relief, in addition to monetary damages, no motion for a preliminary injunction has been filed by the Plaintiff yet.  This action may be an investment by Magnolia to further protect its trade secrets and to serve as a warning to other bakers and competitors that Magnolia will aggressively enforce its confidentiality agreements and protect its business interests through litigation. An important lesson that many companies learn after the fact is that a failure to take any legal action against misappropriation or unfair competition could arguably be construed as either an unintended waiver of a trade secret or embolden other employees to ignore their confidentiality or non-compete agreements.

From a legal standpoint, it remains to be seen whether and to what extent Magnolia’s signature icing swirl is a protectable interest or sufficiently distinctive and famous in its look to entitle Magnolia to injunctive relief against any trade dress infringement or dilution arising from a competitor’s alleged use of the same or similar topping. Magnolia has indeed brought suit against another alleged competitor in the past for infringing on the Magnolia mark (see Magnolia Operating, LLC v. Jennifer C. Appel, No. 10-cv-9312 (S.D.N.Y.), but that case appears to have settled shortly after it was filed. We will keep you posted on this tasty new case.

A district court for the Eastern District of Wisconsin recently held that even though misappropriated information no longer was a trade secret on the date the wrongdoer was sued, a misappropriation lawsuit may be maintained if the information qualified as a trade secret on the date of the wrongdoing.  Encap, LLC v. The Scotts Co., LLC, Case No. 11-C-685 (E.D. Wis., Sept. 14, 2012).

The case involved a dispute between two companies in the lawn and garden industry.  Plaintiff Encap has invented many novel platform technologies in the seed, mulch, and fertilizer industries.  Defendant The Scotts Company is well known for its Miracle-Gro, EZ Seed, and Turf Builder Grass Seed products.

In early 2002, Scotts personnel allegedly had several introductory confidential communications with persons at Encap inquiring about Encap’s platform technologies. In particular, Scotts was allegedly interested in how Encap’s encapsulated seed technology absorbed water.  Scotts allegedly requested cases of Encap’s new seeds for testing purposes.

In June of 2002, Encap allegedly sent Scotts a confidential memorandum, which allegedly contained certain Encap trade secrets. For example, the memorandum contained information about encapsulating seeds to aid in water absorption, using the color of mulch as a watering indicator, and developing a business strategic business plan to exploit these new technologies.  The memorandum, however, provided that Scotts agreed to keep the document confidential and not use or disclose the data within.  A dispute arose when Scotts allegedly used Encap’s confidential information from the memorandum without authorization to make similar competitive products and derive substantial profits.

Encap subsequently sued scotts for patent infringement and trade secret misappropriation.

Encap later brought a motion to dismiss Encap’s trade secret missapropration claim for failure to state a cause of action.  Shortly before Scotts’ motion, Encap requested leave of court to file its 2002 confidential memorandum under seal.

The court entered an order rejecting Encap’s request on the ground that the memorandum was “ten years old and does not contain any apparent trade secrets or underlying data, such as chemical formulas or manufacturing processes.”  Scotts’ motion to dismiss the claim of misappropriation was based on the absence of a trade secret, as seemingly determined by that order.  However, the court reasoned that the decision with respect to filing the memorandum under seal “does not mean that some of the information [in the memorandum] was not a trade secret in 2002 and thereafter when Scotts is alleged to have misappropriated,” and to have used, the information for its own advantage.  So, the motion to dismiss was denied.

This decision teaches that, at least in Wisconsin, just because information no longer is confidential at the time a misappropriation case is filed, a cause of action can be stated if (a) the information constituted a trade secret when the misconduct occurred, and (b) damages resulted.  So, whenever trade secrets are disclosed pursuant to a confidentiality agreement, the party making the disclosure should remain alert for a considerable period to the possibility that the agreement was violated.

By Randy Bruchmiller

Employers periodically fail to sign employment agreements. This situation generally occurs when the employer obtains an employee’s signature on a form employment agreement and simply puts the document in the employee’s personnel file. In this scenario, the signature of an authorized representative of the company is never added to the document. The missing signature usually comes to light when the employee violates the agreement years later, resulting in the employer wanting to take legal action to enforce the agreement. A recent Texas Court of Appeals opinion suggests that an unsigned employment agreement may be unenforceable if the agreement contains a term of more than one year.

In Holloway v. Dekkers, the Dallas Court of Appeals held that an employment agreement lacking the employer’s signature was unenforceable. Dekkers and Twin Lakes Golf Course hired Holloway to serve as the head golf professional at Twin Lakes. The parties initially had an oral agreement that Holloway’s employment contract would be for three (3) years. After further negotiations, the parties agreed that Holloway’s employment would last for a one-year term with the understanding that, prior to the end of one (1) year, they would negotiate the terms of a three (3) year agreement.

Holloway moved from Illinois to Texas and started his employment on August 5, 2008. Within a week, Dekkers’ daughter-in-law presented Holloway with a one page employment agreement dated July 23, 2008. In addition to other terms, the document provided for a “yearly contract that will be up for renewal after annual performance evaluation.” It also contained the recitation, “This contract is hereby agreed upon by both [Dekkers and Holloway] and verified by” their signatures. Holloway signed the document and was given a copy. Dekkers, as owner of Twin Lakes, never signed the document. Holloway was terminated on September 30, 2008, approximately eight weeks later.

Holloway filed suit for breach of contract and fraudulent inducement. The trial court granted summary judgment in favor of Dekkers and Twin Lakes. The Court of Appeals affirmed and held the agreement was unenforceable due to the statute of frauds. The statute of frauds encompasses agreements that are “not to be performed within one year from the date of making the agreement.” If there is more than a year between the time of the making the contract and the time when performance is to be completed, then a writing is required to render the agreement enforceable. The Court of Appeals found that the oral agreement between Holloway and Dekkers/Town Lakes was to work for a term from August 5, 2008 to August 5, 2009, one day more than a year, meaning it had to be backed up in writing for Holloway to enforce it.

The employment agreement at issue in this case involved an employee trying to enforce the agreement instead of the employer. However, employees wanting to get out of their noncompetition or other obligations in their employment agreements that an employer forgot to sign may rely upon this case to argue that the agreement is unenforceable. The statute of frauds argument may be successful if the employment agreement contains a term of more than one year.

Holloway also argued that his initial work for Twin Lakes amounted to partial performance, sufficient to enforce the contract. The Court of Appeals rejected this argument because Holloway was already paid for the work that was partially performed.

Holloway’s fraudulent inducement claim also failed. The Court of Appeals stated that the cause of action fails because the agreement failed. In other words, Holloway could not be induced into a nonexistent agreement.

Employers should always be careful to make sure their employment agreements are signed by both employees and themselves. The best practice is to make sure employment agreements are signed by all parties before new employees begin their employment in order to minimize issues relating to the enforceability of the agreements.

Issues like this plus many more will be addressed at Seyfarth Shaw’s upcoming breakfast briefing in Houston, Texas entitled “Trade Secrets, IP and Your Employees.”  The breakfast briefing will take place on October 10, 2012 from 8:00 a.m. to 10:30 a.m. c.s.t. at the Hilton Americas in Houston. You can register here for the complimentary breakfast briefing.