Thanks to a recent decision of the Georgia Supreme Court, the assignee of confidential and proprietary information has found itself in a Catch 22 dilemma, precluded from suing under the state’s trade secrets statute because the information did not qualify as trade secrets but prohibited by that statute from bringing related common law claims. Robbins v. Supermarket Equipment Sales, LLC, 290 Ga. 462, 722 S.E.2d 55 (Feb. 6, 2012). A similar ruling was issued by the Utah Court of Appeals a few days later. CDC Restoration & Construc., LC v. Tradesmen Contractors, LLC, 2012 Ut. App. 60 (Feb. 24, 2012). Other courts interpreting the preemption provision of the Uniform Trade Secrets Act are divided.

In the Georgia case, the final act of an insolvent company was to assign its confidential and proprietary library of drawings to an entity newly created for the purpose of conducting the same business, with the same employees, as the assignor. Former employees of the assignor made copies of the drawings and went to work for a competitor. The assignee sued them for misappropriation. The trial court held, and the Georgia Supreme Court agreed, that the assignee was basically engaged in a continuation of the assignor’s business and, therefore, had standing to sue even though the misdeed took place before the assignment (indeed, before the assignee even was formed). But in light of the provision in the Georgia Trade Secrets Act stating that the statute supersedes all common law actions for trade secret misappropriation, and notwithstanding the conclusion that the confidential information did not qualify as a trade secret because it was not adequately protected, the supreme court held that the trial court abused its discretion by enjoining the miscreants from using the misappropriated property. 

Section 10-1-767(a) of Georgia’s trade secrets statute states that the law “shall supersede conflicting tort, restitutionary, and other laws of this state providing civil remedies for misappropriation of a trade secret.” Even though the state Supreme Court held that assignee SES’ proprietary information did not constitute a trade secret, the court interpreted the statute as precluding common law claims based on the same allegations that underlie the trade secret misappropriation cause of action. The court said: “For the [statute] to maintain its exclusiveness, a plaintiff cannot be allowed to plead a lesser and alternate theory of restitution simply because the information does not qualify as a trade secret under the act.”

The Utah opinion, which was the subject of a Seyfarth Shaw blog shortly after it was issued, emphasized that a uniform act is to “be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of the [trade secrets] chapter among states enacting it.” The court cited decisions to a similar effect in state and federal courts of Hawaii, Kentucky, Michigan, New Hampshire (Mortgage Specialists, Inc. v. Davey, 904 A.2d 652, 663 (N.H. 2006) (collecting cases holding to the contrary but rejecting them), Ohio (Allied Erecting & Dismantling Co. v. Genesis Equip. & Mfg., Inc., 649 F.Supp.2d 702, 720-22 (N.D. Ohio 2009) (collecting majority cases), Tennessee (Hauck Mfg. Co. v. Astec Indus., Inc., 375 F.Supp.2d 649, 655 (E.D. Tenn. 2004) (same), and Virginia. 

Thus, for plaintiffs in several states, such as Utah and Georgia, pleading misappropriation of proprietary information failing to qualify as a trade secret, the only way around those holdings may be by pleading some form of misconduct that is not based on theft of confidential data.

As discussed in today’s trade secrets webinar entitled "Pleading, Proving and Protecting Trade Secrets in Litigation," in an all to common theme, the plaintiff in L–3 Communications Corporation v. Jaxon Engineering & Maintenance, Inc. et al., 2012 WL 1020516 (D.Colo. March 27, 2012) contended that several of its former employees devised a plan to leave L3 and create a competing business entity regarding specialty electronic equipment by using, among other things, misappropriated, customer lists and pricing data. In what the Court characterized as "the answer to a law school examination", L3’s twenty-six claim Amended Complaint asserted a wide variety of legal theories for recovery, including theft of trade secrets.

Although the Amended Complaint contained some 400 allegations spread over 87 pages, the Defendants moved to dismiss, among other claims, the trade secret claim. The Defendants argued that L3’s claim under the Colorado Uniform Trade Secrets Act should be dismissed, because the claim "fails to identify sufficiently any alleged trade secrets, and fails to plead which Defendants allegedly misappropriated such alleged trade secrets." The District Court disagreed and held that although the "Defendants would certainly prefer that L3 be even more specific in identifying each particular allegedly misappropriated trade secret, and that it be prohibited from referencing other alleged trade secrets in more general terms, the Court cannot say that the Amended Complaint is so bereft of specifics regarding any of the trade secrets at issue here that dismissal is warranted."

Recently the legality of requiring prospective hires to hand over social networking usernames and passwords received national attention when New York Sen. Charles Schumer and Connecticut Sen. Richard Blumenthal asked the U.S. Department of Justice to investigate whether the practice violates federal laws. Although federal legislation has yet to be passed, state legislatures have begun to address the issue.

This month, Maryland will become the first state to pass a law on the practice. Two identical bills, S.B. 433 and H.B. 964, were passed by the State legislature on Monday, and are now headed to Governor Martin O’Malley, who is likely to sign the legislation into law. Under this legislation, which will take effect on October 1, 2012, employers and their agents or representatives are prohibited from requiring workers and job applicants to “disclose any user name, password, or other means for accessing a personal account or service” electronically. In addition, employers are prohibited from refusing to hire an applicant for not providing access to such information. Similarly, employers are not permitted to terminate or discipline an employee for refusing to provide such information. 

In addition to protecting the privacy of current and prospective employees, the Maryland law also provides employers with some protections as well. Under the terms of the law, employees are prohibited from downloading “unauthorized employer proprietary information or financial data” to personal accounts or to websites, and employers are permitted to investigate upon hearing of such activity. Such investigations are intended to ensure “compliance with applicable securities or financial law or regulatory requirements.”   Additionally, employers are permitted to require employees to provide passwords and login information for non-personal accounts that are part of the employer’s own systems, such as company e-mail accounts. Please find our management alert on this new law.

Similar legislation has been filed or is under consideration in other states, including California, Illinois, and New Jersey. In New Jersey, Assemblyman John Burzichelli recently proposed legislation, stating that the practice of handing over usernames and passwords is “no different than asking someone to turn over a key to their house. Demanding this information is akin to coercion when it might mean the difference between landing a job and not being able to put food on the table for your family.”

In Illinois, State Representative LaShawn Ford proposed House Bill 3782, which would prevent employers from requesting any employee or prospective employee to provide a password or account name for a social networking site. The Illinois state Senate will vote on the bill in the next couple of weeks. Assuming the bill passes in the Senate, it will move to a full House vote.   According to Ford, the bill will help prospective employees, “afraid to speak up because they don’t want to prevent themselves from receiving employment, and it protects employers from facing future lawsuits,” which in turn saves taxpayers money.

The increasing state and federal regulation of this practice suggests a growing trend in protecting the privacy of individual employees.   However, some employers are getting around this legislation through the use of third party applications, such as BeKnown or BranchOut, which can be used to provide limited access personal profiles if a job seeker allows it. Often, a prospective employee will be asked to check a box in the job application allowing the use of such third party software. Lori Andrews, an internet privacy law professor at Chicago-Kent College of Law, worries about the pressure placed on applicants, even those who voluntarily provide access to social networking websites. According to Andrews, “Volunteering is coercion if you need a job.”

Some states, such as California, have taken viewpoints like Andrews’ into account in proposing legislation. California Senator Leland Yee (D-San Francisco/San Mateo) recently introduced legislation designed to prevent employers from requesting employees or job applicants provide their social media usernames and passwords, and prohibit employees from voluntarily sharing such information. According to Yee, “It is completely unacceptable for an employer to invade someone’s personal social media accounts. Not only is it entirely unnecessary, it is an invasion of privacy and unrelated to one’s work performance or abilities.”  The Senate Committee on Education recently approved the legislation authored by Senator Yee.

The debate over the amount of privacy interest prospective employees and existing employees are entitled to with respect to social networking is far from over, and we will continue to provide updates in this important area.

Seyfarth Shaw LLP is pleased to announce its third webinar in the 2012 Trade Secrets Webinar Series entitled "Pleading, Proving and Protecting Trade Secrets in Litigation” scheduled for April 24, 2012 at 1 p.m. e.s.t. The speakers for this informative webinar are Seyfarth Shaw LLP partners Michael Wexler, Robert Niemann, and David Monachino.

Most Federal and state courts require that claims for trade secret protection, including claims under the Uniform Trade Secrets Act, be plead specifically as to the nature of the trade secret, or suffer the consequences of challenges to the pleadings. The challenge is to plead with reasonable particularity without actually disclosing the secrets in a public document. From the defense stand point, the identity of the trade secret is paramount to prepare defenses, determine the value of the secrets, and determine if they were actually misappropriated. Our panel will cover all the ethical, technical and practical aspects of initial pleadings that are fundamental to the filing and defending of trade secret claims.

Discovery in trade secret claims often requires plaintiffs to describe the secrets with reasonable particularity before any discovery can be conducted. Disclosures can be made pursuant to statutory requirements, discovery requests, declarations, or by testimony. Defendants wanting to frame discovery to the exact issues and secrets in each case can employ numerous tactics when plaintiffs fail to meet the reasonable particularity requirements. Our panel will explore all of the methods used by both parties to litigation to protect and compel adequate disclosures at the appropriate time.

The timing for use of stipulations and protective orders is always an issue during each trade secrets case. Seeking Court intervention may also come into play in regard to adequate identification of secrets. Our expert panel will review the policies and tactics behind recent case decisions interpreting judicial enforcement and methods of ensuring adequate but fair disclosure for all parties. You can register here. CLE credit will be available to participants in New York, Illinois, and California.

A recent Second Circuit Court of Appeals decision provides guidance regarding New York law concerning permissible and impermissible competitive conduct by the seller of a business, including its “good will,” who — without giving a non-compete covenant — thereafter goes into competition with the purchaser. The Second Circuit was aided by New York’s highest court which answered certified questions concerning the proper interpretation of the so-called “Mohawk doctrine.” The Second Circuit held that, in perpetuity, the seller may not disparage the purchaser, may not actively solicit former clients/customers but may respond truthfully to factual questions posed by them on their own initiative, may not provide the new employer with information that is proprietary to the purchaser but may assist in developing a plan to attract former clients/customers, and may attend meetings with them but must take a largely passive role. Bessemer Trust Co., N.A. v. Branin, Docket Nos. 08-2462-cv(L) and 08-2677-cv(XAP) (2d Cir., Apr. 5, 2012).

Defendant Branin sold the assets of his investment portfolio management business to Plaintiff Bessemer Trust. The assets included client accounts and “good will.” He did not give Bessemer a non-compete covenant. After the sale, Branin worked for Bessemer for a short time, but then resigned and joined competitor Stein Roe Investment Counselors. Branin made no promises to Stein Roe that his clients would follow him, but communicated his hope that 80% of the $2.3 million in revenue he had been generating for Bessemer would transfer to Stein Roe within a year. Before leaving Bessemer, Branin did not inform any of his clients of his impending move.

After Branin commenced employment with Stein Roe, he did not initiate contacts with his former clients. When they asked why he had left Bessemer, he gave mostly benign responses (for example, that Stein Roe’s method of dealing with clients is “more appropriate for my training and experience”). Bessemer sued Branin when the large Palmer family account that he had been managing for 15-20 years transferred to Stein Roe.

The Palmer family’s representative had called Branin and inquired about his reasons for leaving Bessemer. When Branin gave his standard answer, the representative requested a meeting to discuss how the account would be managed if it was moved to Stein Roe. Branin helped Stein Roe prepare by providing information about the Palmer family and the family’s investment philosophy. Branin attended the meeting between the Palmer family and Stein Roe, but took a passive role, apart from making introductions and occasionally amplifying a point. Afterwards, the Palmer family invited Branin to their home to make a specific proposal. Branin accepted the invitation and, while there, told them that Stein Roe’s fees would be the same as Bessemer’s and that the president of Stein Roe would be the number two person on the account. The Palmer family transferred their account to Stein Roethe next day.

Relying on Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276, 283, 419 N.E.2d 324, 328 (1981) — “the vendor is not at liberty to destroy or depreciate the thing which he has sold; there is an implied covenant on the sale of ‘good will’ . . . not to solicit the customer which he has parted with; it would be a fraud on the contract to do so” — the district court held that Branin had violated New York law with regard to the Palmer account and awarded Bessemer $1.25 million. Both parties appealed. 

The federal appellate court initially concluded that under New York law, the principles set forth in Mohawk were unclear as applied to the facts of the Bessemer-Branin litigation. Accordingly, the Second Circuit certified several questions about the Mohawk doctrine to the New York Court of Appeals. Based on the answers, the federal appellate judges concluded that the district court judge erroneously focused on Branin’s intentions rather than his actions. Therefore, the district court’s judgment for Bessemer was vacated, and the case was remanded for further proceedings.

This decision teaches that the buyer of a personal services business (and other purchasers of “good will”) should insist on a covenant not to compete from the seller. Bessemer’s failure to do so has cost the company millions of dollars in lost revenue and enormous legal fees (there have already been five published opinions over the course of the litigation’s six years, and it isn’t over). Under the rules articulated by the New York Court of Appeals, some of which may be a bit naïve (is it believable that sellers of “good will” with long-standing business relationships will forego all meaningful communications with former clients/customers in perpetuity?), absent a covenant future sales of “good will” followed by the seller’s entry into competition could generate similar fact-intensive and expensive lawsuits.
 

On Tuesday, April 10, 2012, a Ninth Circuit en banc panel released its highly anticipated decision in United States v. Nosal and affirmed the judgment of the district court dismissing criminal counts against a former employee of a headhunter firm accused of violating the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 et seq. by conspiring with employees of the former employer to log on to the employer’s confidential database and send proprietary files to a competitor. 

The opinion, authored by Chief Judge Alex Kozinski, and supported by a majority of the 11-judge court, made the following general statements in its introduction:

Computers have become an indispensable part of our daily lives. We use them for work; we use them for play. Some times we use them for play at work. Many employers have adopted policies prohibiting the use of work computers for nonbusiness purposes. Does an employee who violates such a policy commit a federal crime? How about someone who violates the terms of service of a social networking website?

This depends on how broadly we read the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030.

The Court then went on to reject the federal government’s interpretation of the CFAA, finding that the statute was meant to punish hacking, not misappropriation of trade secrets. To find otherwise, Judge Kozinski reasoned would “criminalize any unauthorized use of information obtained from a computer” and “make criminals of large groups of people who would have little reason to suspect they are committing a federal crime.”

“Minds have wandered since the beginning of time and the computer gives employees new ways to procrastinate, by g-chatting with friends, playing games, shopping or watching sports highlights,” Kozinski wrote. “Such activities are routinely prohibited by many computer-use policies, although employees are seldom disciplined for occasional use of work computers for personal purposes. Nevertheless, under the broad interpretation of the CFAA, such minor dalliances would become federal crimes. While it’s unlikely that you’ll be prosecuted for watching Reason.TV on your work computer, you could be. Employers wanting to rid themselves of troublesome employees without following proper procedures could threaten to report them to the FBI unless they quit. Ubiquitous, seldom-prosecuted crimes invite arbitrary and discriminatory enforcement.”

The Court acknowledged that the Eleventh, Fifth, and Seventh Circuits permit employers to pursue CFAA claims against employees who violate computer use policies or violate duties of loyalty to their employer.

The Court reasoned though:

“We remain unpersuaded by the decisions of our sister circuits that interpret the CFAA broadly to cover violations of corporate computer use restrictions or violations of a duty of loyalty. See United States v. Rodriguez, 628 F.3d 1258 (11th Cir. 2010); United States v. John, 597 F.3d 263 (5th Cir. 2010); Int’l Airport Ctrs., LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006). These courts looked only at the culpable behavior of the defendants before them, and failed to consider the effect on millions of ordinary citizens caused by the statute’s unitary definition of “exceeds authorized access.” They therefore failed to apply the long-standing principle that we must construe ambiguous criminal statutes narrowly so as to avoid “making criminal law in Congress’s stead.” United States v. Santos, 553 U.S. 507, 514 (2008).

We therefore respectfully decline to follow our sister circuits and urge them to reconsider instead. For our part, we continue to follow in the path blazed by Brekka, 581 F.3d 1127, and the growing number of courts that have reached the same conclusion.

The Ninth Circuit concluded that because Nosal’s accomplices had permission to access the company database and obtain the information contained within, the government’s charges fail to meet the element of “without authorization, or exceeds authorized access” under 18 U.S.C. § 1030(a)(4).

Because Nosal’s alleged accomplices had permission to access the company database, they did not “exceed authorized access” under the CFAA, the Court held.  “The government assures us that, whatever the scope of the CFAA, it won’t prosecute minor violations,” Kozinski added. “But we shouldn’t have to live at the mercy of our local prosecutor.”

In a powerful dissent, Judge Barry Silverman wrote:

This case has nothing to do with playing sudoku, checking email, fibbing on dating sites, or any of the other activities that the majority rightly values. It has everything to do with stealing an employer’s valuable information to set up a competing business with the purloined data, siphoned away from the victim, knowing such access and use were prohibited in the defendants’ employment contracts. The indictment here charged that Nosal and his co-conspirators knowingly exceeded the access to a protected company computer they were given by an executive search firm that employed them; that they did so with the intent to defraud; and further, that they stole the victim’s valuable proprietary information by means of that fraudulent conduct in order to profit from using it. In ridiculing scenarios not remotely presented by this case, the majority does a good job of knocking down straw men — far-fetched hypotheticals involving neither theft nor intentional fraudulent conduct, but innocuous violations of office policy.

The majority also takes a plainly written statute and parses it in a hyper-complicated way that distorts the obvious intent of Congress. No other circuit that has considered this statute finds the problems that the majority does.  (emphasis added)

It remains to be seen whether the federal government will seek Supreme Court review. There is clearly a circuit split on this important issue. While purportedly committing a federal crime by violating a company’s computer policies by playing sudoku or watching March Madness seems laughable, the majority’s decision leaves employers in the Ninth Circuit, and particularly California, with less options than those in other circuits that recognize CFAA claims (both civil and criminal) for wrongful access of company computers to steal company data for competitive purposes. We will provide additional insight on the implications of the Court’s decision in later posts. As a preliminary matter, companies operating in the Ninth Circuit should reevaluate the scope of access that they provide their employees on their computer systems and limit access to highly valuable information to only those who need to know.

By Robert Milligan and Jeffrey Oh

As part of the process of acquiring of a business and retaining key employees of the acquired business, multiple agreements surrounding the parameters and contingencies of the transaction are often drafted, including asset purchase agreements and employment agreements. These agreements sometimes overlap in scope and ensuring that all material aspects of the deal align in the documents is crucial in maintaining the effectiveness of any singular business transaction. In an order denying defendant’s motion to dismiss in a non-compete dispute involving a former key executive of the purchaser, the Honorable Judge R. Brooke Jackson of the United States District Court for the District of Colorado illustrated the importance of congruity within these sorts of agreements, particularly forum selection provisions. The bottom line is that special care needs to given in the drafting of these documents so that the non-compete provisions and forum selection provisions remain consistent.  

The case, Robert Stuart v. Marshfield Doorsystems, Inc. Civil Action No. 12-cv-00454-RBJ, 2012 WL 872766 (D. Colo. March 14, 2012), concerns a dispute over agreements signed during defendant’s acquisition of plaintiff’s company and retention of his employment services.  In 2004, Stuart and his business partner David Cox sold Consolidated Fiber, LLC, which deals in the manufacturing and selling of commercial and residential doors, to Marshfield Doorsystems. By the terms of the Asset Purchase Agreement (“APA”), Stuart and Cox received $2 million each and agreed to stay with the company and sign separate employment agreements.  The APA included reference to unsigned employment agreements that were attached as exhibits and incorporated by reference.

The APA included a non-competition clause that barred them from joining a competing business for 24 months after the termination of their employment agreements. Additionally, the APA stipulated it would be governed by Delaware law, where Marshfield is incorporated, and that “any dispute, controversy or claim arising out of or relating to” the APA would be settled through arbitration in Chicago, IL. Any dispute not able to be settled through arbitration would then be settled in an applicable court in Chicago.

In concordance with the APA, Stuart signed an Employment Agreement with Marshfield that had him under contract for a five year “Initial Term.” Per the Employment Agreement’s “Renewal Terms” the contract was extended automatically at the end of the Initial Term for one year every year unless terminated by either party through 45 days advance notification. Stuart’s Employment Agreement contained a non-competition clause largely identical to the one found in the APA, but, in contrast with the APA, provided that any and all disputes “arising out of or related to” the Employment Agreement were to be resolved by a court trial without a jury. Moreover, the Employment Agreement contained a merger clause stating that it “merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature between the parties hereto relating to…employment.” The APA and Employment Agreements were apparently executed on the same day.

After the Initial Term had passed, in addition to three subsequent Renewal Terms, Stuart informed Marshfield on January 9, 2012 that he intended to resign approximately four weeks later.  A few days after this, Stuart informed Marshfield that upon his departure, he would be joining TruStile Doors, LLC in Denver, CO.  Marshfield terminated Stuart’s employment on January 17, 2012 and cited the non-competition clauses of the APA and his Employment Agreement in insisting he quit his job with TruStile Doors, which Marshfield considers a competitor.  Marshfield also informed TruStile Doors of Stuart’s agreements and pressed them to terminate his employment.

On February 22, 2012, Stuart filed a complaint in federal court in Denver, Colorado against Marshfield seeking a declaration that the non-competition agreements are not enforceable, or that they were waived, or that they were not violated, as well as an injunction against Marshfield from interfering with his employment at TruStile Doors.  In response, Marshfield requested arbitration through the American Arbitration Association to settle the arbitrable aspects of the dispute in Chicago, per the APA. Marshfield also filed a complaint against Stuart in the United States District Court for the Northern District of Illinois, Eastern Division, seeking an order from the court for arbitration as well an injunction barring Stuart from working at TruStile Doors. Similarly, Marshfield filed a motion to dismiss Stuart’s complaint filed in the Colorado federal action due to improper venue based on the forum selection clause found in the APA, as well as motion to transfer venue based upon forum non conveniens.

Continue Reading Colorado Federal Court Decision In Non-Compete Dispute Demonstrates Importance Of Drafting Enforceable Forum Selection Provisions In Business Transactions

By Erik Weibust and Ryan Malloy

In Troy Industries, Inc. v. Samson Manufacturing Corporation and Scott A. Samson, 81 Mass. App. Ct. 1122 (March 21, 2012), the Massachusetts Appeals Court recently affirmed a jury verdict in the Superior Court that awarded damages to the plaintiff, Troy Industries, Inc., based on the defendants’ violation of a confidentiality agreement and the Massachusetts unfair trade practices statute, Massachusetts General Laws, chapter 93A (“Chapter 93A”).

Troy, a recognized U.S. Government Contractor and weapons designer, sued Samson Manufacturing Corporation and its owner (and former Troy employee), Scott Samson, for breach of a confidentiality agreement and misappropriation of trade secrets and confidential business information. Specifically, Troy sought to enjoin the defendants’ unlawful use of its design for weapon accessories that retrofit and upgrade the M-16 rifle, including a firearm handguard for the rifle named the Modular Rail Forend (“M.R.F.”) Troy alleged that, in April 2003, former employee and machine parts manufacturer Scott Samson signed a confidentiality agreement, agreeing to hold in trust and strict confidence Troy’s confidential business information, and not to use Troy’s confidential information for any purpose other than for Troy’s own business purposes. During his employment with Troy, Samson gained access to trade secrets involving the design of the M.R.F. and other, complex weapons accessories. In December 2004, Samson allegedly began advertising and selling on his website the M.R.F. and other accessories designed by Troy, representing the products as his own designs.

The jury awarded Troy $499,500.00 in damages for Samson’s use of trade secrets or confidential business information, plus $152,000.82 in attorney’s fees and costs. The trial court also issued a permanent injunction, barring the defendants from, among other things, manufacturing, contracting to manufacture, or soliciting, advertising, or accepting orders for sale of the M.R.F. or accessories that are substantially similar in design to the M.R.F. and whose design is derived in significant part from confidential information or trade secrets provided to Samson under the confidentiality agreement.

On appeal, the defendants argued primarily (1) that the confidentiality agreement did not create trade secret protection because it did not specify what was confidential, and (2) that Troy publicly disclosed the M.R.F. at a trade show in February, 2004, thereby losing any trade secret protection.

The Court disagreed, finding that Troy took reasonable precautions to protect its trade secrets, including entering into express agreements restricting disclosure, confining the revelation of its trade secrets to Samson so as to avoid their acquisition by unauthorized third parties, stressing confidentiality of the designs and work orally to Samson, and designating drawings as proprietary.

The Court concluded that Samson subsequently used the trade secrets and confidential business information, thereby breaching the agreement with Troy.
 

On Monday March 26, 2012, Senators Richard Blumenthal (Connecticut) and Chuck Schumer (New York), called for federal agencies to determine whether requiring prospective hires to hand over social networking usernames and passwords violates federal law. Blumenthal and Schumer called on the United States Equal Employment Opportunity Commission (“EEOC”) to investigate whether such practices violate federal anti-discrimination laws and the United States Department of Justice to investigate whether such practices violate the Stored Communication Act (“SCA”) or Computer Fraud and Abuse Act (“CFAA”).

Allowing access to a prospective employee’s social media password could allow the employer to access information the company is prohibited from asking about in the hiring process. Under the Americans with Disabilities Act and Genetic Information Nondiscrimination Act, prospective employers are prohibited from asking about genetic information, age or disability. However, if employers can access a prospective employee’s social media page, they may have access to such information. An employer who then chooses not to hire a member of a protected class or takes other adverse action, may run the risk of allegations that the company violated federal law or state law by refusing to hire a person because of his or her membership in a protected class.

In addition to potentially violating anti-discrimination laws, allowing prospective employers to access a person’s social networking username and password may implicate the SCA or CFAA, according to Blumental and Schumer. “Requiring applicants to provide login credentials to secure social media websites and then using those credentials to access private information stored on those sites may be unduly coercive and therefore constitute unauthorized access under both SCA and the CFAA,” they said in a letter to Attorney General Eric Holder Jr. These two acts, respectively, prevent unlawful access to electronic information without authorization, and unlawful access to a computer without authorization. In Konop v. Hawaiian Airlines Inc, 236 F.3d 1035 (2001), a case cited in their letter, the Ninth Circuit held that the unauthorized access and review of contents of a password protected website can be a violation of the SCA.

Although many commentators agree that it is fairly unusual for employers to ask job applicants for social network usernames and passwords, the issue is one that inspires heated debate. It also appears that the practice may be more prevalent amongst law enforcement agencies and schools. While commentators disagree as to whether the use of such a pre-hiring practice is legal, commentators generally agree that the practice is not likely wise because the information an employer discovers could lead to a claim regarding disparate treatment or discrimination.

Recently, in Michigan, a teacher was fired for failing to handover her password and username after a parent complained of objectionable content on her Facebook page. The story received national media attention, and there has been significant debate over what expectation of privacy an employee should be entitled to. Facebook itself has come out against such practices, issuing a written statement objecting to employers asking applicants or employees for this information. The company has also threatened to sue employers who utilize such practices.

As of now, the current debate on this issue is primarily focused on pre-hire required turnover of passwords for social media accounts. However, in the future, the argument is likely to focus on whether companies can assert an ownership interest in such socila media accounts in whole or part, including the passwords, contacts, and other information contained in the accounts and whether there is truly any differentiation between personal and work accounts.

The question of whether a company can claim ownership in a social media account and the extent to which a company can is just beginning to be addressed by the courts. This past year, in Eagle v. Morgan, a federal court in Philadelphia ruled an employer could claim ownership of a former executive’s LinkedIn Account, where the employer had significant involvement in the creation, maintenance and operation of the account. Similarly, the Northern District of California recently addressed the case of PhoneDog v. Kravitz, which addressed the question of corporate ownership of a Twitter Account. There, PhoneDog, an interactive mobile news and reviews web resource, sued Noah Kravitz, a former employee, who the company claims unlawfully continued using the company Twitter account after he quit. The court found there was sufficient evidence to state a claim for trade secret misappropriation, based on the argument that the Twitter account, the password, and the followers were trade secrets.

Most recently, a Colorado federal court in Christou v. Beatport, LLC, No. 10-cv-02912-RBJ-KMT, 2012 WL 872574 (D. Colo. Mar. 14, 2012), allowed a plaintiff’s trade secret misappropriation claim premised on the theft of MySpace “friends” to proceed. The court found Plaintiff’s efforts and expense in “friending” thousands of potential dance club patrons, and thus having their contact information and permission to contact them, could constitute a protectable trade secret under Colorado law.

Both the legality of pre-hire required turnover of social media passwords and company ownership of social media accounts is likely to be a growing issue in the future, and we will continue to follow it closely.
 

On March 29, 2012, the Seventh Circuit upheld summary judgment in favor of a defendant on plaintiff’s claims for trade secrets misappropriation and unjust enrichment, holding that plaintiff failed to take any measures, let alone reasonable measures, to protect its alleged trade secrets during joint marketing negotiations with defendant. Fail-Safe LLC v. A.O. Smith Corp., No. 11-1354 (7th Cir. Mar. 29, 2012). The decision highlights the need for written confidentiality agreements signed, sealed, and delivered before people explore doing business with each other.

Fail-Safe developed an anti-entrapment pump which prevents pool drains from trapping swimmers. After A.O. Smith representatives learned of Fail-Safe’s pump at a trade show and in a magazine ad, the two companies had several meetings and extensively negotiated A.O. Smith’s possibly marketing and selling the pump for Fail-Safe. Never during the negotiations did Fail-Safe require A.O. Smith to sign a confidentiality agreement not to use or disclose the alleged secret technology, nor did Fail-Safe even raise confidentiality during any meeting or correspondence, even though it had done so in the past with other potential marketing partners. The only confidentiality obligation was on Fail-Safe, which signed a one-way confidentiality agreement without asking for a reciprocal obligation from A.O. Smith. The Seventh Circuit held that the failure to take any precaution to protect the technology precluded Fail-Safe’s trade secrets claim as a matter of law, rejecting Fail-Safe’s argument that whether its protective measures were sufficient was a question to be decided by the jury. The court went so far as to say “you can’t steal free advice,” and that “Fail-Safe courted its own disaster by failing to take any protective measures.”

On the same grounds, the court upheld the district court’s summary judgment on plaintiff’s unjust enrichment claim, holding that defendant could not have been unjustly enriched if plaintiff did not seek to protect the information. Notably, the court did not address any preemption argument; that is, whether an unjust enrichment claim would be preempted by Section 7 of the Trade Secrets Act.

Missing from the court’s opinion was any comment on A.O. Smith’s ostensibly suspect conduct in bringing a competing pump to market after Fail-Safe provided A.O. Smith with the necessary know-how. A.O. Smith sought out Fail-Safe to market the pump, not vice versa, and the parties appeared to closely engage each other regarding joint marketing possibilities. Fail-Safe disclosed its alleged secret technology apparently in good faith, and with hopes for future mutual profit. After Fail-Safe sought to commit the parties’ relationship to writing, A.O. Smith called everything off, and less than two years later (after a reportedly contentious letter-writing campaign with Fail-Safe regarding their alleged rights in the pump), began selling its own pump. Fail-Safe should have at least asked for a non-disclosure agreement, to be sure, and the court noted that Fail-Safe waited nearly two years after A.O. Smith began selling its alleged copycat pump before bringing suit – perhaps an inexplicable lapse of time to enforce rights in alleged proprietary assets. Nevertheless, A.O. Smith’s alleged betrayal of Fail-Safe’s trust appeared to be irrelevant to the court, and the Seventh Circuit’s decision may mean that district courts in the circuit can properly condone allegedly underhanded conduct in the absence of a confidentiality agreement or other demonstrable security measures.