By Robert Milligan, Joshua Salinas, and Jeffrey Oh

Balancing the rights of businesses to protect their economic interests with the rights of individuals to freely express themselves can be a complicated act requiring nuanced application of the law; even more so when the business is of a religious nature. In a fascinating case out of California, Judge Lucy H. Koh of the United States District Court for the Northern District of California, weighed the merits of a trade secret misappropriation claim made by a religious organization against the merits of two anonymous bloggers’ claims under the first amendment.

The case, Art of Living Foundation v. Does 1-10, 2012 WL 1565281 (N.D. Cal, May 1, 2012), involves two alleged former adherents to the religious and spiritual teachings of the plaintiff who have allegedly since become outspoken critics of the organization. They allegedly went so far as to label the group as a “cult and a sham” and allegedly post the group’s proprietary materials on the Internet. Judge Koh ultimately granted an anti-SLAPP motion for one of the defendant anonymous bloggers, but denied the motion pertaining to the blogger that had allegedly admitted to disclosing and posting AOLF’s alleged trade secret materials on the internet.

The Art of Living Foundation (“AOLF”) is the United States branch of the international Art of Living Foundation based in Bangalore, India, and is a California corporation. Founded in 1981 by Sri Sri Ravi Shankar (“Shankar”), the group boasts chapters in over 140 countries and touts itself as “an international nonprofit educational and humanitarian organization. ” AOLF is “dedicated to teaching the wellness and spiritual lessons of Shankar” by offering courses on meditation, yoga, and specialty rhythmic breathing techniques.

The two Doe Defendants, allegedly known pseudonymously by their blog names “Skywalker” and “Klim,” are alleged former AOLF teachers who have been critical of AOLF’s treatment of members, financial management, and the effects of AOLF teachings on its participants. Both Skywalker and Klim allegedly created their own individual blogs to provide a critical perspective on AOLF and Shankar.

On June 1, 2010, Skywalker allegedly began posting AOLF materials on his blog. These materials allegedly included notes about AOLF’s proprietary breathing techniques, training methods, and audio recordings of meditation chants. Around August 25, 2010, an India-based charity founded by Shankar sent a takedown notice to WordPress – the host of Skywalker’s blog –under the Digital Millennium Copyright Act. WordPress notified Skywalker of the takedown notice, who shortly thereafter removed AOLF’s materials from his blog. The court noted that AOLF itself did not discover that its materials had been posted on Skywalker’s blog until late August 2010, after Skywalker had already removed the materials pursuant to the aforementioned takedown notice.

AOLF subsequently brought action against Skywalker and Klim for, inter alia, trade secret misappropriation. Skywalker and Klim moved to strike the trade secret misappropriation claim under California’s anti-SLAPP statute (Cal. Civ. Code Proc. § 425.16). The anti-SLAPP statute protects individuals from litigation that is strategically brought to discourage public participation or punish the exercise of one’s constitutional right to free speech.

To be successful, a special motion to strike brought under California’s anti-SLAPP statute must pass muster under a two-step analysis: (1) the defendant must show that the plaintiff’s reason for bringing suit “arises from an act by the defendant in furtherance of the defendant’s right of petition or free speech in connection with a public issue,” and (2) the plaintiff must then establish a probability that the claim will prevail. Determining that Skywalker’s publication of the documents in question was a public issue directly connected to his criticisms of AOLF, the court found that the Defendants had made a prima facie showing that AOLF’s suit arose from a protected act.

The burden then shifted to AOLF to show a “probability of prevailing” on its trade secret misappropriation claim. The court noted, however, that this showing involves a relatively low threshold for proving a triable claim. (See Mindys Cosmetics, Inc. v. Dakar, 611 F.3d 590 (9th Cir. 2010)). Skywalker and Klim contended that AOLF could not meet its burden because the information and techniques related to breathing techniques and other kinds of meditation information posted online were public knowledge, and thus, not trade secrets. Meanwhile, AOLF argued – and the court agreed – that the training guides contain additional unique information related to teaching methods and instruction that were not public knowledge, and could qualify as a trade secret.

To further meet the “minimal merit” of a trade secret claim necessary to overcome the anti-SLAPP motion, AOLF had to make a showing that the information contained in the allegedly protected documents is “sufficiently valuable and secret to afford an actual or potential economic advantage over others” and that it had made a reasonable effort to keep the information secret. Financial reports submitted by Plaintiff showing that it generated revenue from the courses and lessons contained in the confidential teaching manuals were enough to convince the court that the documents had significant economic value. In declarations submitted to the court, AOLF stated that it keeps these documents on password-protected computers in password protected files, and that it requires both instructors as well as students to sign non-disclosure agreements upon enrollment.

Defendants argued that the non-disclosure agreement at the bottom of AOLF’s course registration forms was not sufficiently conspicuous, and that Plaintiff had failed to produce evidence of similar non-disclosure agreements by the other 140 AOLF chapters around the world. The court found, however, that “[j]ust because there is something else that [Plaintiff] could have done does not mean that [its] efforts were unreasonable under the circumstances.” See id. at 33 (citing Hertz v. Luzenac Grp., 576 F.3d 1103, 1112-13 (10th Cir. 2009)). The court found that the UTSA requires “reasonable efforts” to protect a secret, not maximum security. The court reasoned only “in an extreme case can what is a reasonable precaution be determined on a motion for summary judgment, because the answer depends on a balancing of costs and benefits” in a particular commercial context, which involves issues of fact.  See id. at 34 (citing Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d 174, 179 (7th Cir. 1991). Given the evidence of a reasonable effort by Plaintiff to keep the information contained in the teaching manuals secret, in addition to the novel information contained therein, Judge Koh found that AOLF had met the minimal standard of maintaining its trade secret claim.

In further defense of their anti-SLAPP motion, Skywalker and Kilm argued that the case should be thrown out due to “excessive entanglement with free exercise” as well as for a lack of misappropriation. The excessive entanglement defense argues that deciding a case of this nature would force the courts to rule on religious doctrine, thereby violating the separation of church and state. Citing Religious Tech. Ctr. v. Netcom On–Line Cmty. Servs., 923 F.Supp. 1231 (N.D.Cal. 1995), Judge Koh disregarded this argument, noting that “there is no authority for excluding any type of information [from trade secret protection] because of its nature alone.” In particular, Judge Koh explained that, “it is possible for the Court to adjudicate Plaintiff’s trade secret claim by resort to neutral principles of trade secret law and without excessive entanglement in matters of religious doctrine or practice.”

As for the lack of misappropriation argument, Judge Koh was inclined to agree that in the case of Klim, there was no evidence to support a finding of misappropriation. However, given Skywalker’s admission that he had in fact posted the teaching manuals on his blog, the same could not be said for him. As a result, the court granted in part the anti-SLAPP motion as to Klim, but denied in part the motion as to Skywalker.

On June 12, 2012, the parties held a Settlement Conference and a settlement was reportedly reached. (See settlement details and other information about the case at Citizen Media Law Project’s website). Pursuant to the settlement agreement, Skywalker and Klim published a joint statement informing its blog readers about the settlement and that their blogs would be frozen on June 19, 2012. They noted in their statement that there are no restrictions on the Does to create new blogs, and that no identity had or would be disclosed in relation to this litigation and settlement. In return, AOLF agreed to drop the lawsuit with prejudice and to pay Skywalker and Klim’s attorney’s fees.

No matter the type of business or service offered, it is in the interest of all businesses to vigorously defend their trade secrets by taking the necessary precautionary measures. For example, the fact that AOLF required all participants – both students and teachers – to sign non-disclosure agreements was key evidence to demonstrate AOLF’s “reasonable efforts” to protect its trade secrets and ultimately defeat Skywalker’s anti-SLAPP motion.

This case also reaffirms that information that may be related to religion can be protected as a trade secret. The court recognized that a defendant cannot simply deprive a plaintiff’s information trade secret protection simply by invoking the Free Exercise Clause. Indeed, this would raise other problems other the Free Exercise Clause by depriving religious organizations of protections of civil law that are available to others.

Finally, this case illustrates that information disclosed publicly online for a short period may not necessarily lose its trade secret status. The court did not seem overly concerned that AOLF’s materials had been posted online for several months and viewed by several hundred members of the public before Skywalker received a takedown notice and removed the materials. It is evident though that companies must move promptly to have any protected information removed from the Internet once they become aware of it should they want to protect its trade secret status and pursue available remedies against those who have improperly posted it.

As a special feature of our blog –special guest postings by experts, clients, and other professionals –please enjoy this blog entry about the impact of software on IP strategy by technology lawyer and IP strategist Joren De Wachter. Joren serves as a Vice Chair with me on the ITechLaw Intellectual Property Law Committee and has an excellent blog of his own on current technology issues. Enjoy Joren’s article

-Robert Milligan, Editor of Trading Secrets

By Joren De Wachter

Everything becomes software

Marc Andreessen, co-founder of Netscape and currently co-founder and general partner of the venture capital firm Andreessen-Horowitz, wrote in August 2011 in the Wall Street Journal about how “Software is eating the world”.

While Mr Andreessen was building on earlier observations, such as the author of this article, that software is the “viral” industry, as it infects all other industries, he did provide some focus onto a very important phenomenon.

This phenomenon is the fast growing importance of software in pretty much any industry or human activity. This reflects is the practical side of the fact that we are converting (updating?) into a digital world.

This is a profound change, with many consequences.

One consequence is that the software invasion is not limited to the way products function or are sold. While it is true that a phone is no longer a phone, but a very powerful small computer with a basic personal conversation application, just like a car is turning into a very powerful large computer with a basic personal transportation application (an App that will automate soon), the presence and impact of software is much more pervasive than that. All other aspects of business, and society, tend to become computerized. From supply chain management to enterprise resource planning, from marketing to HR, from legal to sales(force.com), all aspects of activity become computerized, and the relative importance of software in all of those aspects is growing.

A second consequence is that the growth of the digital part of an activity inevitably outpaces the growth of the non-software part. This is caused partly by Moore’s law, but also by the fact that software is not called “information technology” for nothing. Information tends to multiply, and increase its productivity, much faster than hardware.

The graph gives a pretty good illustration of what happens when software enters into an activity or product. The red line represents growth in software added value, the blue line in hardware added value. The relative importance of software tends to grow at exponential or semi-exponential rates, while the non-software parts grow at a more linear rate.

Inevitably, the software becomes the most valuable and important part of the product, service or activity.

And this has some profound consequences on the way businesses define their IP strategy.

Why is this relevant to IP strategies?

There are two reasons why the viral effect of software is very relevant to all IP strategies.

The first reason is related to the business models that apply to software.

Software is brought to market through business models that are different from those used for hardware or services.

One of the important differences is that software is not sold, but licensed. While the license can be bundled with other aspects of business, such as services (maintenance, support, implementation, etc), and those services will often play an essential part in building the business, the license is always a core part of any software business model.

And the great advantage of licenses is their flexibility and versatility.

Software licenses range from extremely closed to extremely open. Rights of licensees can be very wide, or very limited. There are relatively few legal limitations on how you can license software.

And this, in turn, offers great potential to structure, adapt and modify business models in new and different ways.

In practice, it means that, as the relative importance of software in a business offering is growing, such a business acquires more flexibility to modify and fine-tune its business model and strategy.

The second reason is that software is one of the few technologies where both patents and copyrights apply.

Copyright applies to the code in which software is written. But copyright only protects against copying the particular code of a piece of software, it offers no protection to the functionality expressed through that code.

On the other hand, it is possible to patent certain functionalities of software. Even though the conditions of patentability vary between the major jurisdictions, the principle remains the same: patents will apply to a function of the software, regardless of the code that expresses that function.

This means that the viral effect of software, once it has “contaminated” a business, and software becomes an important part of the value proposition of such business, has as a practical effect that it will add complexity and variability to IP strategies, because more IP rights will apply to a much wider range of possible business models.

IP rights actually don’t fit very well with software

But there’s more.

When we look at how software businesses deal with IP rights, we notice that, until relatively recently, “technical” IP rights, by which I mean patents and copyrights (but not trademarks) did not have a very strong influence on either technological development or business models around software.

There is in reality very little software that gets patented, and, while copyright is a key element in determining the licenses under which software is sold, there is actually very little use of copyright in its “classical” way, which is to prevent competitors from using your copyright.

It is only since software has invaded the market of mobile telephony that we start to see a lot of patent litigation and enforcement around this technology – and this raised awareness of IP is related to the technical interaction between the software and the hardware, rather than the software itself.

The reason why IP rights are in general weak in software is related to the specific characteristics of software, which operates at three levels – and IP rights don’t deal with those levels in the same way.

The three levels at which software operates are technology, functionality and content.

Technology is the level where we may find patents: technology is the underlying core of software, and the level at which software interacts with hardware. But, as said, while some aspects of this level are patentable, and do get patented, a lot of innovation of software at this level does not benefit from a strong protection IP strategy. This relates e.g. to software languages, middleware, operating systems and similar technologies.

The reason why IP rights don’t work very well at this level is because their success is dependent on their open character. Think of the original story of Microsoft, who beat Apple back in the 80s and 90s, because Microsoft’s technical standards were open, and anyone could (and did) program for Windows, whereas Apple kept everything closed, and was almost pushed into irrelevance.

This story is repeated in the success of the Apple App store in the beginning of the 21st century: only because the development kit is effectively completely open, was Apple able to get developers to bring out those millions of Apps with their billions of downloads.

In other words, the more you close the system (for which you could potentially use patents), the less success you will have in the market.

At the level of functionality, the story is worse. Not only is it much harder to patent “pure” software functionality, it is also much more useless. This is caused by the relative flexibility and ease with which such functionality can be created – the arms race is heavily tilted against patenting functionality. And copyright, as we know, does not protect functionality.

Finally, as far as content is concerned, while copyright applies, it will not come as a great shock to hear that Information Technology enables free copying, from a technical perspective, much easier than its opposite, the rather ineffectual DRM or digital rights management.

This is, in turn, re-inforced by the advent of user generated content, a tendency that blurs the line between function and content, and that turns every consumer of content into a producer of more, derivative content. This is a phenomenon that current IP rights have no valid answer to – and so they risk being ignored, which is exactly what we start to see with phenomena like Pinterest, but even Twitter and Facebook.

Moreover, the speed of innovation in software is staggering. 50% of all software used today is less than three years old. That means that the turnover rate of technology is so fast, that the classical approach of IP rights, aimed at recovering over longer periods of time the initial investment in technology, has not sufficient time to take root.

So we see how “classical” IP rights are significantly weaker and less relevant in the software world, because of the characteristics of software.

And that’s not all.

The shock of Open Source

Open Source uses IP rights, for a purpose that aims specifically at preventing IP rights to apply.

The copyleft, viral, licenses such as the GPL (the GNU General Public License http://www.gnu.org/licenses/gpl.html) , effectively prevent the normal operation of IP rights, where an exclusive right holder will be enabled to enforce the protections offered by IP rights to demand a premium or rent for the right to use the technology developed.

This is done through enforcement of the copyright license, which obliges the licensee to respect the four freedoms of Open Source, which include the freedom to run on any technology, and modify the software – approaches that are anathema to classic IP strategies.

And Open Source is no longer a marginal phenomenon, it is quickly becoming mainstream.

Current estimates are that more than one third of all code written in 2011 was written in Open Source code. Open Source proponents claim that 75% of all enterprise software contains Open Source elements, and predict that this number will rise to 99% by 2016.

In most markets where Open Source enters and acquires critical mass, proprietary software providers tend to get pushed out of the market, or become marginal players  themselves, surviving only through a focus on niche markets or niche functionality.

This is caused by the fact that most users, and certainly B2B users, find that Open Source software tends to be better, more innovative, more secure and more stable than their rival proprietary products. Time-to-market is significantly faster for Open Source software, step-in costs are lower, and vendor lock-in issues are much easier to handle.

Moreover, any industry dealing with open standards will have a tendency to go to Open Source. It is no coincidence e.g. that, as the car manufacturing industry wants to continue to cut costs and ensure interoperability between its different providers, OEM or otherwise, up the value chain, it is moving into the Open Source direction.

This will have an important impact on how IP rights are used.

To put it as a caricature: if everything becomes software, and all software becomes Open Source, are IP rights doomed?

The increased relevance of IP strategies

I don’t think IP rights are doomed.

What will have to change, though is how we use IP rights, and how we define what an IP strategy is.

Historically, an IP strategy is about protecting investment in innovation and technology.

With the advent of software, and the rising importance of Open Source, that will have to change in a number of ways.

The first change is that the question on use of IP rights in the business model will become more complex and more sophisticated, both in terms of more IP rights that apply, and a much wider variety of business models available.

The second, and most fundamental, change is how IP rights will be used.

IP rights will no longer be used to simply “protect” innovation, they will become an essential tool that determines how innovation is brought to the market.

Just like Open Source uses copyright (an IP right) to enforce its anti-IP philosophy, so will any business and IP strategy have to look at the way it can use IP rights as an essential part of the structure of the business model, supporting the ultimate goals of the business.

Another important consequence will be the relative decline of the importance of “technical” IP rights, such as patents and copyrights, versus the growing importance of trademarks, designs and logos. These are IP rights that are not based on technical or creative innovation, but on identifying and distinguishing a product or service from its competitors.  As the protective aspect of technical IP rights becomes less relevant, the importance of identity IP rights, and branding in general, will increase.

This is because businesses will coalesce their technical skills around the value of their brand and trademarks, rather than through the possibility to block technical copying by competitors. A good example of this trend is Red Hat, the first $1bn Open Source provider. Their license to Linux or other Open Source products is based on a combination of services, specific customization, technical support and the use of the Red Hat logo and brand. For a lot of Red Hat products, the source code is available but you have to invest time and money to get it, and potentially approve it.  Why not spend that money on the reassurance of a skilled provider who will help you solve your problems? After all, for a lot of products, customers find that the question “does it work”  matters a lot more than “who owns the IP”?

Other IP rights may struggle. It seems difficult to see how Trade Secrets can remain very relevant when the amount of data produced by humanity (including its computers) continues to explode at a rate of a 100% increase every 18 months, and where every second year can claim to have produced more data than in the entire history of mankind until the end of the previous year. The problem is not so much that we will forget how important Trade Secrets are, it is just that the relative cost of keeping something secret will become prohibitive when all the other information drops 50% in cost every 18 months. It is another example of the immense creative destruction power of the combined exponential increases in computing power, communication capability and data storage.

What that means is that IP strategies will no longer be able to focus simply on the “protection” side of IP rights, but will have to work with the structural, constructive side of IP rights, enabling businesses to better understand what their unique value-add is, and then structure IP rights around that value-add, and bringing it to the market in the most efficient way for that business.

And the balance between those different IP rights will become, even more than today, a key consideration in any business strategy.

In other words, IP strategies become, much more than today, a key part of the heart of the business model itself.

Joren De Wachter is an experienced IP strategist, with a focus on ICT technology businesses. He can be reached at info@jorendewachter.com

 

Early last week, we wrote a post on a unique circumstance in which a non-compete agreement was ruled unenforceable by the California Court of Appeal despite the fact that it was executed pursuant to the sale of a business.  (Fillpoint, LLC v. Maas (August 24, 2012)). Following up on that post, I had the chance to speak with Colin O’Keefe of LXBN regarding the subject. In the interview, I explain the background of the case, the court’s reasoning behind its decision, and what other companies can learn from the case:

 

A Connecticut federal court recently issued a significant decision concerning the rights of a buyer of a business to enforce non-competition agreements against employees who previously worked for the seller under New York law.

In 2003, Milso and each of its employees signed an employment agreement expressly governed by New York law. The agreement contained confidentiality, non-solicitation and non-competition covenants enforceable for 18 months after termination of employment, but assignability was not mentioned. In 2005, the employer, a casket company, sold its assets, expressly assigning all employment agreements. At the closing of the purchase and sale transaction, the seller terminated its employees, and then the purchaser re-hired them on substantially similar terms. The purchaser asked its employees to acknowledge that they remained subject to the covenants. Three years later, two of the purchaser’s employees, who had worked for the seller but never executed the acknowledgement, resigned and began working for a competitor. The purchaser sued them in a Connecticut federal court for breach of contract, misappropriation of trade secrets, and similar causes of action. They responded by filing a declaratory judgment counterclaim asserting that, for purposes of the employment agreement covenants, they were terminated at the closing of the assets purchase and sale transaction which was more than 18 months before they began competing.

On cross motions for summary judgment, the court held that if the signatories to the employment agreements intended for the agreements to be assignable, the covenants were enforceable against employees who accepted comparable continuous employment by the purchaser. Here, the issue of the parties’ intent with regard to assignability requires a trial. Milso Indus. Co. v. Nazzaro, Case No. 3:08CV1026 (AWT) (D. Conn., Aug. 30, 2012).

The purchaser also accused the departed employees of misappropriating trade secrets, namely, a customer list and a “confidential business plan.” The court ruled that those items could qualify as trade secrets if they have “independent economic value” and reasonable efforts were undertaken to maintain their confidentiality. A trial is necessary to determine whether the list and plan here qualified as trade secrets.

The Connecticut federal court’s decision is particularly instructive with regard to the right of an assignee of an employment agreement, which contains no provision regarding assignability, to enforce covenants in the agreement. The court concluded that the dispositive question is: Did the parties to the agreement intend for it to be assignable. The assignee’s burden is to prove that the signatories to the agreement — the assignor and the assignors’ employee — understood at the time the agreement was signed that it was assignable.

Companies involved in buy-sell transactions or mergers need to take special care to ensure that there are enforceable non-compete/restrictive covenant agreements in place with employees who remain with the buyer after the transaction is complete –that may include relying upon existing non-compete agreements between the seller and the employees or new agreements between the buyer and the employees depending upon the law in the applicable jurisdiction. John Marsh’s Trade Secret Litigator blog has an excellent summary of two recent cases from Ohio and Florida concerning the assignment of non-competes agreements. Also, please consider watching our webinar on Key Considerations Concerning Trade Secrets and Non-Competes in Business Transactions for more information on this important topic.

By Robert Milligan and Grace Chuchla

In a recent opinion, Creech, Inc. v. Brown, the Kentucky Court of Appeals both affirmed the ability of Kentucky courts to modify overly broad non-competition agreements in the employment context and laid out a six-part framework that trial courts may follow when analyzing the reasonableness and enforceability of non-competition agreements.

The court also reaffirmed that continued employment is sufficient consideration for non-competition agreements, notwithstanding the existence of some critical commentary concerning existing Kentucky precedent.

In sum, the case confirms that employers can and should use non-competition agreements with Kentucky employees and that continued employment is sufficient consideration for asking an existing employee to sign a new or updated non-competition agreement. Employers should recognize, however, that each case is fact specific and that the courts may apply a six-part framework in determining the extent to which a non-competition agreement will be enforced, if at all.

Relevant Facts/Procedure

This opinion arose out of a dispute between Charles T. Creech, Inc. and Standlee Hay Company, Inc. Both Creech and Standlee provide hay and straw to horse farms in Kentucky and other areas of the United States. Donald Brown was hired by Creech in 1990. In 2006, Brown signed a document entitled “Conflict of Interest,” which, in relevant part, prohibited him from “work[ing] for any other company that directly or indirectly competes with the company for 3 years after leaving Creech, Inc. without the companies [sic] consent.”

In 2008, Brown resigned from Creech and began to work for Standlee Hay. Creech did not oppose this move; in fact, Creech signed a partial waiver of Brown’s non-competition clause that allowed him to work for Standlee as long as he did not partake in business pursuits that competed with those of Creech. Additionally, after Creech signed the waiver, Standlee notified them that Brown would be working in Kentucky and therefore necessarily be contacting Creech’s customers. Creech did not respond to this notification.

Creech proceeded to file suit against Standlee and Brown. The trial court entered a temporary injunction against Brown and Standlee, but this decision was overturned on appeal. On remand, in part because of the statements made by the court of appeals when overturning the injunction, the trial court granted Brown and Standlee’s motion for summary judgment. Creech then appealed the trial court’s summary judgment ruling.

On appeal, Creech argued that the agreement was supported by valid consideration and that its terms were reasonable. Creech also argued that if the agreement was fatally lacking in a reasonable geographic limitation, the trial court was empowered to establish such a limitation. Standlee and Brown countered that the agreement’s restriction on Brown’s future employment was invalid because its terms were unreasonable and because it lacked consideration. They also asserted the trial court did not possess the authority to insert a reasonable geographical limitation into the agreement and that Creech waived any rights it did secure under the contract.

Guiding Principles

In its analysis of the trial court’s ruling, the court began by stating that “very few bright-line rules govern the inquiry now before us.” However, despite the lack of bright-line rules, it stated that there are two “guiding principles” that govern non-compete cases in Kentucky:

1) trial courts are empowered to modify unreasonable provisions of covenants not to compete, and doing so will save an agreement which might otherwise be unenforceable; and

2) judgment on the reasonableness of non-competition agreements should be based on whether they sufficiently protect the interests of the employer while neither interfering with the public interest nor placing undue hardship on the employee.

The court stressed the need for case-specific flexibility. According to the court, the factual circumstances of a covenant not to compete will necessarily vary from industry to industry, from employer to employer, and from region to region and attempting to erect a set of bright-line rules to govern courts’ treatments of these agreements would be futile and counterproductive.

In addition to these two guidelines, the court acknowledged that the “general rule” in Kentucky that non-competes “are not enforceable where they are…unlimited as to space but limited as to time” has never been explicitly overruled in the context of employment cases. The court then stated, however, the blue pencil rule extends to all provisions of a non-competition agreement. Kegel v. Tillotson, 297 S.W.3d 908, 913 (Ky. App. 2009) (“[O]ur courts have adopted a ‘blue pencil’ rule, whereby we are empowered to reform or amend restrictions in a non-compete clause if the initial restrictions are overly broad or burdensome.”).

The court found that in another Kentucky appellate decision, Hodges v. Todd, 698 S.W.2d 317, 319 (Ky. App. 1985), the court held “that the trial court had the authority to enforce [a noncompetition] covenant [which wholly omitted a geographical limitation] by establishing a reasonable geographical limitation based on the intention of the parties at the time the contract was executed.” According to the court, the case admittedly addressed only those non-competition agreements which were part of a contract for sale of a business. The court reasoned, however, given “the persistent tendency of Kentucky courts to apply rules governing noncompetition agreements in contracts for the sale of business to those included in employment contracts, and vice versa, we believe it likely that the old rule that employment contracts whose covenants not to compete fail to state a geographic limitation are invalid is probably no longer the law.”

Six Factors To Analyze As Part of Guiding Principles

The court then fleshed six factors that it stated that may be considered when deciding the reasonableness and enforceability of a non-competition agreement:

1) The nature of the industry;

2) The relevant characteristics of the employer;

3) The history of the employment relationship;

4) The interests the employer can reasonably expect to protect by execution of the non-competition agreement;

5) The degree of hardship the agreement imposes upon the employee (The court stated that this is also the point in the analysis where the trial court may modify certain provisions of the noncompetition agreement if doing so would not work an injustice upon the parties, if a modification would make the agreement reasonable, and if the court determines in its discretion that it is wise to do so (citing Kegel, 297 S.W.3d at 913); and

6) The effect the agreement has on the public.

In a footnote, the court was careful to state that none of these factors are a new creation; rather, this opinion is simply “the first to express them together in this manner.” The court also stated that not all of the categories or all questions within a category which are identified in the opinion must be addressed in every inquiry as the list of factual circumstances which may bear on each factor is neither mandatory nor exhaustive. Rather, the court reiterated that the trial court’s approach must be flexible depending on the parties and their circumstances.

Working off this framework, the court reversed and remanded the trial court’s entry of summary judgment, finding that “the evidence…was insufficiently developed to resolve all of the factors listed above.” The court stated that the key issue on remand was to answer the question whether, “on consideration of the subject, nature of the business, situation of the parties, and circumstances of the particular case,” the noncompetition clause now at issue “is such only as to afford fair protection to the interests of the [employer] and . . . not so large as to interfere with the public interests or impose undue hardship on the party restricted.” The court concluded it must therefore reverse the summary judgment order as prematurely issued and remand the matter to give the parties the opportunity to put forth sufficient proof for proper resolution of the case under this analysis.

Sufficiency of Consideration

The court also analyzed the sufficiency of consideration of the non-competition agreement. The court held that “[t]o the extent the entry of summary judgment may have been premised upon the court’s conclusion that the noncompetition agreement lacked consideration, we also reverse.” The court found that it was undisputed that Brown continued his employment with Creech for more than two years after he signed the Conflicts of Interest document and that he departed the company voluntarily. However, “the courts of Kentucky and those applying Kentucky law found that employer-employee agreements may be executed in exchange for merely retaining one’s job.” Higdon Food Servs., Inc. v. Walker, 641 S.W.2d 750 (Ky. 1982). The court noted that Higdon decision was strongly criticized but stated that “it remains precedent that this Court lacks authority to change.” In applying the precedent to the undisputed material facts, the court concluded as a matter of law that the agreement was supported by sufficient consideration.

Also adding to the court’s decision to reverse and remand was the aforementioned waiver that Creech had signed. At the time of filing its complaint, Creech raised the claim that the waiver was based off false information, and the court of appeals found that a question of fact still remained as to whether Creech intentionally waived its rights under the non-competition clause. Summary judgment was, therefore, premature.

In the end, Creech, Inc. v. Brown stands as a helpful and instructive case containing “guiding principles “ for Kentucky employers looking to properly structure their non-competition agreements and to evaluate their enforceability.

As a special feature of our blog –special guest postings by experts, clients, and other professionals –please enjoy the third part of a three part blog series by digital forensics expert Jim Vaughn, a Managing Director of Intelligent Discovery Solutions.

By Jim Vaughn

Welcome to part 3 of this three part series. Part 1 covered the BYOD concept and storage devices/areas considered for trade secret investigations, Part 2 covered forensic artifacts potentially located on devices such as Blackberry’s, iPhones/iPods or Androids, and now Part 3 will cover the design and application of protocols.

Because protocols are necessarily fact and equipment specific, this is not intended to be an out of the box protocol, but instead it is a pseudo protocol used as an attorney guide to the discussion points you will probably have with your forensic expert when drafting an actual protocol.

Let’s assume a set of hypothetical facts: Several departed employees went to work for the same competitor. These employees may have left all at once, or through a trickle effect over time that eventually raised suspicion. The former employer has raised theft of trade secrets allegations.

How do the facts play into the need to develop a protocol, or do they?

Within these facts, an effective protocol should include the means to identify, preserve, collect, review, produce (return) and remediate the data of interest. These protocol guidelines are intended to assist Plaintiffs, Defendants or Forensic Neutrals.

The Anatomy of a Protocol

What is a Forensic Protocol? For purposes of this blog I will describe it as a set of agreed upon instructions between the legal team(s) and the forensic team(s) to provide for the consistent, methodical, high quality collection, cataloging, and analysis of electronic devices.

In addition to how to produce and remediate, a typical protocol will contain instructions on how to mechanically collect your devices, instructions on how to document your devices and instructions related to the analysis of interest.

You may also desire to pre-plan and document searches of the collected data for specific keywords, investigate the usage of online repositories for storage of sensitive data, search for personal email usage and investigate the transfer of sensitive data to personal computers or other personal devices such as smart phones or tablets.

You may consider the inclusion of custodian questionnaires and/or affidavits from the individuals involved. These are designed to give the peace of mind that all new employer data sources and employee personal devices/storage areas have been identified, searched and remediated.

Your forensic expert should have a solid understanding of what questions to ask to understand the many types of data sources that could play a role in the investigation, and what company and system configurations need to be considered to execute an effective protocol.

Imaging/Collection of Data

Part 1 listed several data sources for consideration. If data collection techniques are part of your protocol, know there are several ways to collect data and the method of collection may be dependent on the source being collected. Included here are three different methods to forensically collect data from a workstation (e.g. laptop/desktop):

The hard drive will be physically removed from the workstation(s) to be imaged and attached to one side of an industry recognized forensic imaging hardware device.

If deemed better to leave the original hard drive in the workstation for imaging, then an industry standard forensic software program capable of being run from CD will be used for creating the forensic images.

If the laptop is using encryption, the login credentials will be provided so a live forensic image can be created.

For other data sources, there are specific methods and/or tools that are standard within the forensic community. Protocol verbiage may be precise as to the required tools to be used, or more general to include language that just requires it to be performed and documented in a forensically sound way. Generally speaking, the larger the collection effort and the more people involved, the more helpful precise language will be. In either case your forensic expert should quality control the forensic collections for completeness and accuracy.

Your protocol should include verbiage that will document particularities of each data source identified or collected as part of the protocol. This will include the computer/server’s make, model, and serial number, and if possible, documentation of the hard drive(s) located inside each computer. Depending on the circumstances, you may want pictures as part of the documentation.

Device Documentation/Analysis of Interest

Now that you have the evidence forensically captured, let’s look at items you may want to include in the protocol as part of the analysis. These items will help you determine certain things like when the hard drive was put into use, when the operating system was installed, users of the computer(s), what external devices were connected and what files were opened from these connected devices. Some sample wording for these activities include:

1) Investigate and document the format date of the hard drive(s);

2) Investigate and document all dates of installation (and/or reinstallation) of the operating system;

3) List all Windows accounts, including all administrator accounts, system accounts and user accounts, and include documentation of the following information for each account:

a) When the account was created;

b) When the account was last accessed (used);

4) Investigate and document the existence of any type of external device connected to any hard drive (e.g., thumb drives, CD-ROMs, DVDs, external hard drives, etc.);

5) Investigate and document the dates, types of software, manufacturers of any software, and name(s) of any software used to potentially wipe, erase, or shred data on any computer hard drive(s);

6) Investigate and document the dates and name(s) of any software used to perform virus scans, and whether such programs were used; and

7) Investigate and document the existence of any link file(s) that show files being opened from any remote location, CD/DVD or an externally connected device.

In summary, this blog post was designed to help lawyers and clients understand the pros, cons and challenges when considering the use of protocols. I hope it has helped you gain a better understanding of how to approach trade secret investigations from a technical perspective, causes you to ask a lot of technical questions, and to use your forensic expert as your “geek speak” translator.

Mr. Vaughn is a digital forensics expert who has given testimony in nearly 65 cases involving topics such as evidence preservation, documentation of events, and computer forensic methodologies. In addition to being an EnCase Certified Examiner (EnCE), Mr. Vaughn is certified by the International Association of Computer Investigative Specialists (IACIS) as a Certified Forensic Computer Examiner (CFCE). Mr. Vaughn has extensive experience working on litigation and consulting matters involving computer forensics, e-discovery and other high technology issues. He serves his clients through the litigation or consulting lifecycle by assisting them with important issues like data scoping, preserving, gathering, processing, hosting, review and production, as well as deeper diving issues uncovered through the use of computer forensics. Mr. Vaughn can be contacted at jvaughn@idiscoverysolutions.com. Please note that each case may be unique and this single blog post is not intended to fully cover everything related to trade secret investigations or constitute advice, legal or otherwise. It is always best to consult a qualified person to assist with any investigation.

We are pleased to announce the relaunch of our popular Trading Secrets blog.

The blog is a resource for employers that provides timely legal and news updates to C-suite executives, corporate in-house counsel, technology and security officers, and HR professionals concerned about protecting their valuable trade secrets, intellectual capital, workforce, customer relationships, and other confidential information.

The blog will continue to provide up-to-the-minute information on the latest legal trends and cases across the country, as well as important thought leadership and resource links and materials.

The relaunched blog now offers a mobile device version; our popular and informative webinars on trade secret, non-compete, and computer fraud issues; and updated resource and link materials, including an archive library from 2008 to the present.

A webinar password can be obtained by contacting your Seyfarth Shaw attorney or by contacting the Trading Secrets editor at rmilligan@seyfarth.com. CLE credit is available for the one-hour webinars upon request.

Following the Trading Secrets blog will be one more tool to keep you ahead of the curve. We invite you to sign up to receive our blog alerts by email by clicking here.

If you enjoy the Trading Secrets blog, we ask that you consider nominating us for the ABA’s Top 100 Legal Blawgs. You can access the nomination form here.

Following up on Jessica Mendelson’s previous post on the subject, Jessica had the chance to speak with Colin O’Keefe of LXBN regarding the shocking story involving a federal court clerk who allegedly gave confidential information to street gangs in California. In the brief interview, Jessica explains what happened and how this is an example of why the Computer Fraud and Abuse Act should be more broadly construed.

A reporter for a business publication somehow obtained information contained in a privately held company’s confidential interim financial statements. As the reporter was about to disseminate that information in an email alert to the publication’s subscribers, the company sued, described the financials as trade secrets belonging to the company, and obtained from a Louisiana state court judge a TRO enjoining issuance of the email. The defendant removed the case to the Eastern District of Louisiana federal court where a magistrate judge conducted a preliminary injunction hearing and then ruled that freedom of speech and of the press guaranteed by the First Amendment trumped the company’s efforts to prevent a potential violation of the Louisiana Uniform Trade Secrets Act. Rain CII Carbon, LLC v. Kurzy, Civ. Ac. No. 12-2014 (E.D. La., Aug. 20, 2012).

Rain CII Carbon, LLC is one of the largest coke calciners in the world (coke calciners convert a by-product of the oil refining process into a material essential to aluminum smelting). Its quarterly financial compilation statements are confidential, made available only on a secure, password-protected website to persons who have a right to the information and who sign a non-disclosure agreement.

The day after a compilation of Rain’s 2012 second quarter financial results appeared on the company’s website, business publication Debtwire, a member of the Financial Times Group, prepared the email alert reporting Rain’s earnings. What particularly rankled the company was that its highly confidential gross margins could be calculated from information in the email alert.

Rain immediately filed suit against Debtwire in a Louisiana state court, requesting a TRO — and preliminary and permanent injunctions — to stop the publication. That court granted the TRO. Debtwire’s emergency appeal was unavailing, whereupon Debtwire removed the litigation to federal court based on diversity jurisdiction. Rain promptly filed an amended complaint, adding Kurczy (the reporter who broke the story) and corporate affiliates of Debtwire as defendants, and Rain moved to remand on the ground that complete diversity was lacking. The motion to remand was denied. A preliminary injunction hearing was scheduled for one week later, the parties stipulating that the TRO would remain in place until the hearing.

The hearing took place on a Friday. Among the documents admitted into evidence was Kurczy’s affidavit in which he swore that he had not accessed Rain’s secure website and had not seen the earnings compilation itself. The court issued its ruling the following Monday which was only three weeks after the compilation had been prepared. For purposes of the motion for preliminary injunction, the judge accepted Rain’s contentions that its earnings compilation constituted a trade secret and that publication might cause irreparable economic harm to the company. Nevertheless, finding that the information in the email alert was truthful and was of potential interest to the email’s subscribers, the court held that Rain had failed to overcome the strong presumption against a prior restraint.

First Amendment cases suggest that a litigant must overcome significant obstacles in order to persuade a federal court to enjoin the press from publishing truthful information on a matter of public concern, even if what is to be published is a trade secret. Having had more success in the state courts than in the U.S. District Court , Rain currently is in the process of appealing to the Fifth Circuit Court of Appeals denial of the motion to remand.

We previously blogged in our 2011 year end review about a noteworthy trade secret misappropriation case where DuPont Co. successfully obtained a jury verdict of approximately $920 million in damages against rival Kolon Industries Inc. DuPont sued Kolon for the alleged theft of trade secrets regarding a proprietary fiber used to make “bulletproof” police and riot gear.

Yesterday, U.S. District Court Judge Robert Payne (E.D. Virginia) issued a 20-year worldwide permanent injunction against Kolon, which prohibits Kolon from producing and manufacturing its Heracron fibers that were found to use and incorporate DuPont’s trade secrets.

John Marsh at Trade Secret Litigator has an excellent discussion of this astonishing decision and explains how this decision may have tremendous implications throughout the U.S. and worldwide.

One of the major takeaways from this case is Judge Payne’s holding that the U.S. Supreme Court’s 2006 decision in eBay Inc. v. MercExchange, L.L.C.–which had a significant impact on patent cases because it eliminated the presumption of irreparable harm–does not apply to trade secret injunctions. In particular, Judge Payne found that eBay applied to federal statutes (e.g. patent, trademark, copyright), but not Virginia’s Uniform Trade Secrets Act.

In light of the recent proposed legislation for a federal trade secret statute, we wonder whether such a federal statute would change Judge Payne’s analysis and the applicability of eBay to trade secret injunctions.