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On May 31, 2023, a Harris County Texas District Court jury found a telecom company acted in bad faith by filing a $23 million trade secret misappropriation lawsuit against a rival where the underlying technology was found to not actually be a trade secret.

Background & Analysis

In February 2019, Telecom firm Teligistics, Inc. (“Teligistics”) sued its rival Advanced Personal Computing, Inc. d/b/a Liquid Networx (“Liquid Networx”) and company executives Travis Wood and Robert Short, alleging they misappropriated trade secrets concerning its online platform for handling contracts named Telibid. Specifically, Teligistics alleged a former Liquid Networx employee obtained a copy of Teligistic’s internal Request for Proposal (“RFP”) in order to “tweak” Liquid Networx’s internal RFP, rather than spending time and resources developing their own RFP. 

Continue Reading Not All Documents Labeled Confidential Actually Are: Texas Jury Finds $23M Trade Secret Case Was Brought in Bad Faith
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In Seyfarth’s third installment in the 2023 Trade Secrets Webinar Series providing valuable insights into navigating this evolving landscape, Seyfarth attorneys covered a range of topics, including the latest technology threats, the importance of communication and training, revisiting confidentiality policies, alternative trade secret protections, and updating restrictive covenant agreements. Here are the key takeaways from the Seyfarth webinar:

  1. Staying Informed about Technology Threats: Employers must stay up to date with the latest technology employees can use to misappropriate sensitive data. This includes being aware of potential tools and methods that could compromise trade secrets. Equally important is keeping abreast of advancements in technology that can help detect and prevent such misappropriation. By staying informed, organizations can proactively address emerging threats to their trade secrets.
  2. Communication and Training for Trade Secret Protection: Regular communication and training are critical in ensuring that employees understand the significance of treating proprietary information with extreme care. The webinar emphasized the need for clear and consistent messaging about the value of trade secrets and the consequences of mishandling them. By fostering a culture of awareness, organizations can strengthen their employees’ commitment to protecting trade secrets.
  3. Revisiting Confidentiality Policies for Remote Work: The shift to remote work necessitates revisiting confidentiality policies and practices. Organizations must ensure that their policies address the unique circumstances of virtual and hybrid work environments. This includes reviewing remote access protocols, data encryption methods, and guidelines for secure information sharing. Adapting confidentiality policies to the remote work setting helps safeguard trade secrets effectively.
  4. Implementing Alternative Trade Secret Protections: Given the current legislative and regulatory activity surrounding non-compete agreements, organizations should explore additional trade secret protections. The webinar emphasized the importance of implementing confidentiality training, policies, and agreements. Regular audits to track trade secrets and limiting access to only those who need it for their job responsibilities were highlighted as crucial measures to mitigate risk.
  5. Updating Restrictive Covenant Agreements: To comply with evolving state and federal laws, organizations should review and update all restrictive covenant agreements. Ensuring that these agreements are narrowly tailored and legally compliant is essential. By keeping restrictive covenants in line with the latest legal requirements, organizations can strengthen their trade secret protections while mitigating potential legal risks.

This webinar shed light on the critical aspects of safeguarding trade secrets in the evolving remote work landscape. By staying informed about technology threats, fostering communication and training, revisiting confidentiality policies, implementing alternative trade secret protections, and updating restrictive covenant agreements, organizations can effectively protect their valuable intellectual property. These takeaways provide a roadmap for organizations to navigate the unique challenges of managing trade secrets in a remote work environment while staying compliant with legal obligations.

You can view a recording of the webinar and all other webinars in our Trade Secrets & Non-Competes Webinar Series here.

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On January 1, 2022, the latest amendments to the Illinois Freedom to Work Act (“Act”) became effective. As we previously described, that Act sets forth various requirements governing restrictive covenant agreements in Illinois. Among other things, the Act codified the so-called Fifield Rule by defining adequate consideration for enforcement of a restrictive covenant to be either two years of employment or some other consideration, such as “additional professional or financial benefits.”

Not surprisingly, what are sufficient “additional professional or financial benefits” remains an open question. However, one recent appellate opinion from the Third Appellate District provides helpful instruction regarding the need to specifically identify the “additional professional or financial benefits” in any restrictive covenant agreement. In Midwest Lending Corp. v. Horton, 2023 IL App (3d) 220132, the Appellate Court affirmed the trial court’s dismissal of the plaintiff’s complaint pursuant to which the plaintiff sought to enforce certain post-employment restrictive covenants. The defendant, who was employed for only seven months, challenged the enforceability of the restrictive covenant agreement because he was not employed for at least two years and received no other consideration. In response, plaintiff relied upon a $25,000 sign-on bonus that defendant received as part of his offer letter and claimed that this bonus was “adequate consideration.” The court disagreed because the offer letter never identified the restrictive covenant agreement nor any of its terms. As such, the plaintiff failed to demonstrate that the bonus was consideration expressly provided in exchange for the defendant agreeing to the terms of the restrictive covenant agreement.

While Midwest Lending’s ruling was based on common law and not a construction of the Act, employers who opt to provide additional consideration to enforce restrictive covenant agreements should take care to explicitly identify the “additional professional or financial benefits” provided in exchange for the employee’s acceptance of the restrictive covenants.

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Establishing jurisdiction over a defendant is critical in every lawsuit. Trade secret cases are certainly no different.  A recent appellate decision from Texas underscored this important point by dismissing a plaintiff’s claim against a defendant – who did not even deny that he received misappropriated trade secrets – for lack of jurisdiction.

The case is Joe Formicola v. Virtual Integrated Analytics Solutions, LLC, 14th Court of Appeals, Texas, Case No. 14-22-00412-CV (the state court case is Virtual Integrated Analytics Solutions LLC vs. Optimal Designs Incorporated et al., Case No. 202215877, in the 189th District Court of Harris County, Texas). On May 11, 2023, the Texas Court of Appeals Court overturned the trial court’s ruling and granted Formicola’s request to dismiss Virtual’s claims against him for lack of personal jurisdiction.  

The plaintiff, Virtual, is a Texas company, which sells products and services to a variety of technological Industries. One of Virtual’s direct competitors is Optimal Designs Inc., another Texas corporation controlled by James Reed, a Texas resident. 

Virtual offered to purchase Optimal and hire Reed as a new director. Reed accepted the offer, but before the deal was completed, Virtual began sharing trade secrets with Reed, including a profit-sharing agreement that Virtual was actively negotiating with another company, Himarc. Virtual tasked Reed with finalizing the agreement with Himarc, but instead of doing so,  Reed started seeking out other partnerships that included Optimal and excluded Virtual.  It was during this time that Reed approached Joe Formicola, a Michigan resident, and offered to deliver the misappropriated Himarc partnership. Formicola accepted Reed’s proposal and began engaging in a business partnership with Reed based on Virtual’s confidential information and business relationship.

Virtual ultimately filed suit against several individuals and entities, including Formicola. In response, Formicola filed a special appearance for purposes of challenging jurisdiction, but the trial court denied Formicola’s motion. At no point did Formicola ever attempt to contest the trial court’s jurisdiction over him on a factual basis, nor did he ever produce any evidence disproving Virtual’s allegations that he had received misappropriated trade secrets from Reed. Instead, Formicola simply challenged the trial court’s jurisdiction on a purely legal basis by arguing that Virtual’s allegations, even if true, were insufficient to establish both general personal jurisdiction and specific personal jurisdiction.

In its response to Formicola’s motion, Virtual only addressed the issue of whether the trial court had specific personal jurisdiction over Formicola. Similarly, on appeal, Virtual only defended the trial court’s exercise of specific personal jurisdiction.

As the Texas Court of Appeals noted, “Virtual did not allege that Formicola ever came to Texas to meet with Reed regarding this business relationship. Similarly, Virtual did not allege that Formicola agreed to operate this business in Texas, or that he ever solicited any business customers in Texas. Virtual did not even allege that Formicola had hatched the plan to misappropriate Virtual’s trade secrets. Quite the opposite, Virtual alleged that Reed obtained the trade secrets from Virtual in Texas, and then Reed approached Formicola in Michigan with a plan for their misappropriation.”

Based on these facts, the Appeals Court concluded that “Reed’s unilateral activity cannot be attributed to Formicola for jurisdictional purposes. The facts alleged in Virtual’s live pleading, even if true, do not demonstrate that Formicola purposefully availed himself of the privilege of conducting activities in Texas.” Accordingly, the Appeals Court concluded that “the trial court erred by denying Formicola’s special appearance because the facts alleged by Virtual are legally insufficient to show that Formicola purposefully availed himself of the privilege of conducting activities in Texas” and dismissed all of Virtual’s claims against Formicola for lack of personal jurisdiction.

Takeaway:  Before incurring the considerable time, energy, and expense associated with preparing and filing suit against a defendant in a trade secret case (where, more often than not, it is critical that the case proceed immediately and likely also involves a motion for emergency injunctive relief), be particularly careful to have nailed down personal jurisdiction.  Thoroughly examine where the alleged misappropriation and wrongdoing occurred, especially in cases involving parties from multiple states. Otherwise, extremely valuable time could be lost forever to the detriment of your legitimate trade secret claims.

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Wednesday, July 19, 2023
3:00 p.m. to 4:00 p.m. Eastern
2:00 p.m. to 3:00 p.m. Central
1:00 p.m. to 2:00 p.m. Mountain
12:00 p.m. to 1:00 p.m. Pacific

REGISTER HERE

Confidentiality obligations and restrictive covenants are crucial tools employed by organizations to protect sensitive information, trade secrets, and competitive advantages. However, recent state law and regulatory developments and NLRB decisions have created a complex web of considerations that employers must navigate when drafting and enforcing these agreements. Seyfarth’s fourth installment in the 2023 Trade Secrets Webinar Series aims to provide in-depth insights into two key areas of concern: carveouts to employment confidentiality obligations and the intersection between the NLRB and restrictive covenants, including the NLRB’s recent attacks on confidentiality provisions and non-compete agreements.

During this webinar, our esteemed panel of legal experts will delve into the following key topics:

  • The evolving landscape of employment confidentiality obligations and risks created by overbroad restrictions
  • The NLRB’s increasingly aggressive positioning against restrictive covenants
  • Recent case studies
  • Strategies for compliance and risk mitigation

Speakers

Alex Meier, Partner, Seyfarth Shaw LLP

Sul Ah Kim, Partner, Seyfarth Shaw LLP

Cary Burke, Partner, Seyfarth Shaw LLP

REGISTER HERE

If you have any questions, please contact Sadie Jay at sjay@seyfarth.com and reference this event.

This webinar is accredited for CLE in CA, IL, NJ, and NY. Credit will be applied for as requested for TX, GA, WA, NC and VA. The following jurisdictions may accept reciprocal credit with these accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, CT, NH. The following jurisdictions do not require CLE, but attendees will receive general certificates of attendance: DC, MA, MD, MI, SD. For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used in other jurisdictions for self-application. Please note that attendance must be submitted within 10 business days of the program taking place. If you have questions about jurisdictions, please email CLE@seyfarth.com.

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On May 25, 2023, the Second Circuit issued an opinion in Syntel Sterling Best Shores Mauritius Ltd. v. TriZetto Group, Inc., No. 21-1370 (2d Cir. 2023) that provides guidance regarding recoverable damages in trade secret misappropriation disputes under the Defend Trade Secrets Act (“DTSA”).

The Second Circuit held that under the DTSA unjust enrichment damages cannot be awarded for avoided development costs absent evidence that the trade secret’s value was diminished by the misappropriation. The Second Circuit also provided clear instruction on what remedies are available under the DTSA, limiting the amount that a plaintiff can recover.  An injured party may be entitled to both equitable relief and monetary damages upon a finding of liability under the DTSA.  As to compensatory damages, the DTSA permits the recovery of: (1) “damages for actual loss caused by the misappropriation;” and (2) “damages for any unjust enrichment caused by the misappropriation…that is not addressed in computing damages for actual loss.”

The Second Circuit clarified that damages for unjust enrichment are meant to apply to instances such as “where the value of the secret is damaged, or worse yet – destroyed.”  On this basis, the court vacated the jury’s $285 million compensatory damage award to TriZetto which was predicated on Syntel’s avoided development costs, that is, the money Syntel saved by misappropriating a competitor’s trade secret rather than developing it itself.  The court declared that when deciding whether unjust enrichment in the form of avoided costs is available to an injured party, the relevant inquiry is into whether the misappropriation injured the party beyond its actual lost profits.

In this instance, the Second Circuit held that because Syntel’s misappropriation “did not diminish, much less destroy,” the commercial value of TriZetto’s trade secrets, and because the district court had enjoined Syntel’s use of the trade secrets, “TriZetto suffered no compensable harm” beyond its lost profits.  Thus, as a matter of law, TriZetto was “not entitled to avoided costs as a form of unjust enrichment damages.”  In reaching this conclusion, the Second Circuit expressed concern that by focusing only on the misappropriating party’s saved expenses to award avoided costs without also examining the damage suffered by the injured party and the effect of injunctive relief, “avoided costs would be available as unjust enrichment damages in any case of misappropriation, even where a trade secret owner suffers no compensable harm beyond its lost profits or profit opportunities.”  In the view of the court, this “would permit avoided costs awards that are more punitive than compensatory.”

Syntel Sterling demonstrates that, at least in the Second Circuit, unjust enrichment damages, including avoided costs, are not available without evidence that the misappropriation harmed the commercial value of the trade secret.

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Following the recent passage through the New York State Senate, on June 20, 2023, the New York State Assembly voted to approve a bill, which, if enacted, would ban all post-employment non-compete agreements. We previously reported on the key features of Senate Bill S3100A here. Assembly Bill A1278 is now headed to Governor Hochul’s desk for review, and she has 30 days from receipt to consider the Bill. Given her 2022 State of the State agenda in which Governor Hochul explicitly wrote in favor of legislation to eliminate certain non-compete agreements, expectations are that she will sign the Bill into law. While several states have recently enacted legislation placing income restrictions on non-competes, New York is poised to prospectively ban all employee non-competes regardless of income, making it the fifth state to do so after California, North Dakota, Oklahoma, and Minnesota. We will continue to monitor and report on any further developments.

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Wednesday, June 21, 2023
3:00 p.m. to 4:00 p.m. Eastern
2:00 p.m. to 3:00 p.m. Central
1:00 p.m. to 2:00 p.m. Mountain
12:00 p.m. to 1:00 p.m. Pacific

REGISTER HERE

In today’s digital age, trade secrets are an essential asset for businesses to stay ahead of the competition. As businesses continue to operate remotely, protecting trade secrets has become increasingly important. Seyfarth’s third installment in the 2023 Trade Secrets Webinar Series will provide valuable insights and practical tips on how to manage and safeguard your company’s confidential information in a remote work environment.

During the webinar, you will learn about the following topics:

  • The importance of trade secret protection in a remote work environment
  • The risks associated with remote work and trade secret protection
  • Strategies for safeguarding trade secrets in a remote work environment
  • Best practices for managing trade secrets in a remote work environment

Speakers

Katherine Perrelli, Partner, Seyfarth Shaw LLP
Dawn Mertineit, Partner, Seyfarth Shaw LLP
Cathryn Johns, Associate, Seyfarth Shaw LLP

REGISTER HERE

If you have any questions, please contact Sadie Jay at sjay@seyfarth.com and reference this event.

This webinar is accredited for CLE in CA, IL, NJ, and NY. Credit will be applied for as requested for TX, GA, WA, NC and VA. The following jurisdictions may accept reciprocal credit with these accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, CT, NH. The following jurisdictions do not require CLE, but attendees will receive general certificates of attendance: DC, MA, MD, MI, SD. For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used in other jurisdictions for self-application. Please note that attendance must be submitted within 10 business days of the program taking place. If you have questions about jurisdictions, please email CLE@seyfarth.com.

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New York is poised to join the growing number of states enacting legislation to curtail the use of non-compete agreements by employers. On June 7, 2023, the New York State Senate voted to pass Bill No. S3100A, which, if enacted, would ban all post-employment non-compete agreements, along with Bill No. S6748, which is generally aimed at preventing the establishment of monopolies, monopsonies, and restraints of trade by, among other things, curtailing  the use of non-compete agreements. The Bills are currently awaiting passage by the New York State Assembly and are expected to be signed by Governor Kathy Hochul.

Continue Reading New York State Senate Approves Bills Banning Use of Non-Compete Agreements
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As various states and federal agencies seek to prohibit or limit the use of non-competes, Connecticut joined the trend. Connecticut’s new legislation, SB 9, expands restrictions on the enforceability of physician non-competes and extends these restrictions to advanced practice registered nurses (APRNs) and physician assistants (PAs).

Connecticut: SB 9

On June 5, 2023, the Connecticut Senate passed SB 9, sending it to Governor Ned Lamont to sign into law. The governor’s signature is a formality as the bill passed both houses of the Connecticut Legislature unanimously. By limiting the circumstances in which non-competes are enforceable under Connecticut law, SB 9 adds additional restrictions to the use of such covenants in physician employment agreements while extending these restrictions to APRN and PA employment agreements. Notably, the bill was significantly amended prior to passage with earlier versions banning non-competes for physicians, APRNs and PAs entirely.

Continue Reading New Non-Compete Health Care Restrictions in Connecticut