We are pleased to announce the webinar “Protecting Trade Secrets and Intellectual Property in Business Transactions” is now available as a podcast and webinar recording.

In Seyfarth’s ninth installment of its 2014 Trade Secrets Webinar series, Seyfarth attorneys focused on considerations involving protecting trade secrets and intellectual property in business transactions, including, mergers and acquisitions, joint ventures and other collaborative arrangements.

As a conclusion to this well-received webinar, we compiled a list of key takeaway points, which are listed below.

  • The protection of intellectual property is critical in joint venture and other agreements in order to protect what, many times, is some of the most important assets of the company. These protections may include protecting the confidentiality of the information and addressing what rights each party will have in the intellectual property after the transaction or venture.
  • Companies should protect their trade secrets at every level of the employee hierarchy.  Executives and high-level employees usually have employment agreements that address confidentiality and the handling of trade secret information.  Mid-level managers and lower level employees are often over-looked.  It is important to have all employees enter into confidentiality agreements and, in many cases, intellectual property assignment agreements.
  • Regardless what protections are put in place, it is very important to be aware of law changes in the states where the company has employees and to revise agreements to address any changes in the law.

Beginning in January 2015, we will begin another series of trade secret webinars. The first webinar of 2015 will be “2014 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law.” To receive an invitation to this webinar or any of our future webinars, please sign up for our Trade Secrets, Computer Fraud & Non-Competes mailing list by clicking here.

Other than to protect good will or trade secrets, a non-compete provision intended to prevent a former employee from acquiring an interest in, or becoming an officer or director of, a competitor of the ex-employer may not be enforceable.

Summary of the case:  A stand-alone agreement executed by employee-participants vested in their employer’s profit-sharing plan contained an unusual non-compete provision.  It prohibited participants, for five years after termination, from owning or becoming an official of a “similar” trade or business located within 25 miles of the employer’s facility in Columbus, Nebraska.  A participant resigned his employment and sought from a Nebraska state court a declaration that the provision was an unreasonable restraint.  The trial court entered the requested judgment order, and the employer appealed.  A few weeks ago, the Nebraska Supreme Court affirmed.  Gaver v. Schneider’s O.K. Tire Co., 289 Neb. 491 (Nov. 14, 2014).

The covenant.  The express purpose of the non-compete provision was to assure that profit-sharing plan participants did not use plan benefits “to the detriment of the Employer.”  Participants were permitted to become mere employees of a competitor but not to be officers, directors, or owners of a financial interest. 

The decision below.  The trial court reasoned that the provision would prevent ex-employees from engaging in any form of competition.  In that court’s view, the covenant provided greater protection to the employer than was necessary.

The decision on appeal.  The appellate tribunal affirmed.  It held that while an employer may legitimately seek to preserve its good will and confidential information, that was not the goal of this restrictive covenant.  Instead, it was intended to limit the use employees could make of their own funds, earned and already received. 

Takeaways.  This decision conceivably could have broad implications for future lawsuits involving non-competes and profit-sharing plans at least in Nebraska, but more likely it will be limited to its peculiar facts.  For example, the appellate tribunal declined to decide whether the employer could have enforced the non-compete provision if it had been included in the profit-sharing agreement rather than in a stand-alone document.  Nor did that court state whether what it called the “time and space” of the non-compete, five years and 25 miles from the employer’s place of business, were valid (however, the court did include a citation to a Nebraska deferred compensation case holding that a “4- to 5-year time restriction contained in [a] forfeiture-for-competition clause” was unreasonably long).  Finally, there was no ruling as to the meaning, much less the legality, of the prohibition’s purported scope (restrictions applicable to businesses “similar to” that of the employer).

Employers, although contractually free to terminate the employment of at-will employees for any reason, at any time, cannot dismiss an employee in violation of public policy. A prime California public policy is that employers cannot retaliate against whistleblowers—individuals who have reported suspected unlawful employer conduct. In January 2014, the Legislature expanded the general whistleblowing statute, Labor Code section 1102.5, to prevent employers from taking retaliatory action in a belief that “the employee disclosed or may disclose” relevant information.

On November 21, 2014, in Diego v. Pilgrim United Church of Christ, the California Court of Appeal clarified that Section 1102.5, even in its pre-amended version, forbids employers to terminate “perceived whistleblowers,” even if that belief is mistaken.

The Facts

Cecilia Diego worked as an assistant director of Pilgrim United’s preschool. Diego claimed that a coworker had contacted the Licensing Division of the California Department of Social Services to report a foul odor in a classroom and inadequate sand beneath the playground equipment. The Licensing Division then conducted an unannounced inspection, but found no violations and issued no citations. Diego claimed that her supervisor then asked Diego why she had made the reports. Diego understood that her supervisor believed that she had been the source of the anonymous complaints to the Licensing Division, even though this was not the case.

Shortly after the inspection, Diego failed to appear at a meeting her supervisor had scheduled for her. Pilgrim United then discharged Diego for insubordination.

When Diego sued Pilgrim United, claiming that her termination was retaliatory and in violation of California public policy, the trial court granted summary judgment against her claim. The trial court found that Diego had failed to identify a significantly important public policy that was implicated by constitutional or statutory authority: Diego had failed to cite “any case holding that an employer’s mistaken belief that the employee reported a violation can support a claim for wrongful termination in violation of public policy.”

The Appellate Court Decision

The Court of Appeal reversed the trial court. It held that California’s public policy “applies to preclude retaliation by an employer not only against employees who actually notify the agency of suspected violations but also against employees whom the employer suspects of such notifications.” The Court of Appeal reasoned that the policy embodied by former Labor Code section 1102.5 (which did not expressly address an employer’s belief about whistleblowing) was not limited to employees who actually reported violations, because such a limitation would discourage employees from reporting violations in the first instance.

In addition, the Court of Appeal found that the alleged “insubordination” was not so well established, for purposes of summary judgment, to withstand Diego’s proof that the employer’s assertion of insubordination was a mere pretext for unlawful retaliation in the belief that Diego had been a whistleblower.

What Pilgrim United Means For Employers

California Labor Code section 1102.6 already provides that if an employee proves that the employee’s protected activity was “a contributing factor in the alleged prohibited action,” then the employer must show by “clear and convincing evidence that the alleged action would have occurred for legitimate, independent reasons even if the employee had not engaged in [protected] activities.” Pilgrim United reinforces the point that employers should document performance issues and disciplinary decisions to help support later decisions to discipline an employee.

In TNS Media Research, LLC v. TiVo Research & Analytics, Inc., 2014 U.S. Dist. LEXIS 155914 (S.D.N.Y. Nov. 4, 2014), the Southern District of New York applied the Supreme Court’s recent Octane Fitness decision in awarding attorney fees to patent defendant Kantar.  Octane Fitness v. ICON Health & Fitness 134 S. Ct. 1749 (2014); http://www.seyfarth.com/publications/OMM050114-IP. 

The district court also awarded Kantar fees it incurred in successfully defending trade secret misappropriation claims.  Did Octane Fitness influence the court’s fee award for the trade secret claim, notwithstanding the different standards for fee shifting between the Patent Act and state trade secret laws? 

1.  Fee Shifting in Patent and Trademark Cases Under Octane Fitness.

Fee shifting in patent cases is governed by 35 U.S.C. § 285 which reads, in its entirety: “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.”  Octane Fitness seemingly made it easier for patent defendants to obtain fees by setting forth a flexible framework for determining if a case is “exceptional” under 35 U.S.C. § 285: 

an “exceptional” case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position … or the unreasonable manner in which the case was litigated.

Id. 1756.  In announcing this more flexible interpretation of “exceptional,” the Supreme Court emphasized considering the “substantive strength” of the parties’ claims and defenses, and dispensed with a prior formulation that generally required the defendant to show, by clear and convincing evidence, that infringement allegations were baseless and brought in bad faith.  The prior formulation, the Supreme Court reasoned, was “so demanding that it would appear to render § 285 largely superfluous,” given that district courts already possess the inherent power to award fees in cases involving misconduct or bad faith.

Fee shifting in trademark cases is governed by 15 U.S.C. §1117 which reads: “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.”  In other words, the Lanham Act and Patent Act recite the same “exceptional” language, and courts have already proceeded to apply Octane Fitness in trademark cases.  See e.g. Fair Wind Sailing, Inc. v. Dempster, Case Nos. 13-3305, 14-1572 (3d Cir., Sept. 4, 2014).

2.  Fee Shifting in Trade Secret Cases.   

State trade secret statutes do not contain the “exceptional” case language found in the Patent Act and Lanham Act.  Instead, trade secret defendants in most states seek fees under Section 4 of the Uniform Trade Secrets Act (“UTSA”), which reads, in relevant part: “[i]f … a claim of misappropriation is made in bad faith … the court may award reasonable attorney’s fees to the prevailing party.”  Interestingly, the comment to UTSA Section 4 references following “patent law” in considering fee awards: “patent law is followed in allowing the judge to determine whether attorney’s fees should be awarded even if there is a jury, compare 35 U.S.C. Section 285.” 

While New York has not adopted the UTSA, Federal Courts applying New York law can rely on their inherent power to award fees to the defendant.  Ransmeier v. Mariani, 718 F.3d 64, 68 (2d Cir. 2013) (“[a] court may exercise its inherent power to sanction a party or an attorney who has acted in bad faith, vexatiously, wantonly, or for oppressive reasons) (quotations omitted).  Such inherent power is generally available to federal courts in connection with any type of lawsuit, and is not unlike the UTSA fee shifting language requiring bad faith by the plaintiff. 

3.  The S.D.N.Y’s fee awards in the TNS Media Case. 

The TNS Media case is a technology dispute relating to collecting data on television viewing.  The plaintiff (“TRA”) claimed that defendant Kantar engaged in acts of patent infringement and trade secret misappropriation (under New York Law).  The district court entered summary judgment in favor of Kantar on both claims and Kantar sought fees from TRA. 

In granting Kantar’s motion for fees in connection with the patent infringement allegations, the district court applied Octane Fitness and found the case to be “exceptional” under Section 285, based in large part on the substantive weakness of the patent claims TRA maintained.  For example, the court found certain TRA arguments on patent claim construction to be not only wrong, but also sanctionable. 

TRA’s proposed construction “does violence to the ordinary grammatical understanding of the past tense.” No correct application of the rules of grammar could have supported TRA’s proposed construction. Thus, TRA’s proposed construction lacked merit and was frivolous.  See e.g. Id. at * 24. 

The district court continued by awarding  Kantar fees in connection with the trade secret misappropriation claims based on its inherent power:

TRA’s analysis lacked critical elements of a claim for trade secret misappropriation. For that reason, TRA’s claims were frivolous. In fact, I find here that bad faith may be inferred because TRA’s claims were “so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose[.]”   Id. at *37.

The district court explicitly recognized the difference in legal standards for fee shifting between the patent and trade secret claims — the later requiring bad faith.  Yet, similarities in the analyses suggest that the Octane Fitness patent fee shifting standard was influential in the trade secret fee award.  For example, both fee awards were driven in large part by TRA’s maintaining claims perceived to be substantively weak:

Kantar, in order to collect any attorneys’ fees or costs for its defense of the patent-related claims, must demonstrate it incurred those fees and expenses as a direct result of TRA’s litigation misconduct or frivolous arguments (as described in this Opinion and Order).

Similarly, with respect to the non-patent-related attorneys’ fees awarded under the Court’s inherent power, Kantar must demonstrate that the fees it seeks to collect are only those fees that directly resulted from its defense against the five trade secret claims that were adjudicated at summary judgment. No fees or costs will be awarded as a result of the trade secret claims dropped subsequent to the April 23, 2013 status conference.

Id. at *39.  Also, fee awards in favor of trade secret defendants have not been very common.  In fact, a brief survey of the case law proffered by both sides in their briefing did not reveal any examples of a fee award being awarded to a trade secret defendant.  Thus, the TNS Media’s decision to award fees on the trade secret count appears to be fairly unique.

4.  Octane Fitness’ Impact on Trade Secret Litigation Going Forward.

Given the differences in legal standards, Octane Fitness is not likely to impact trade secret litigation as much as it has impacted patent and trademark litigation.  Yet, some impact would not be surprising.  For example, prevailing trade secret defendants in non-UTSA states, such as New York, may rely on TNS Media in seeking fees.  Trade secret defendants in UTSA states may even consider relying directly on Octane Fitness based on the UTSA’s comment referring to courts following “patent law” for fee shifting guidance. 

A Seyfarth team just finished co-editing and co-authoring a prominent new California trade secret treatise that is now available for purchase.

Los Angeles trade secrets partner Robert Milligan co-edited and co-authored a chapter in the recently released Third Edition of Trade Secret Protection and Litigation in California, a treatise published by the Intellectual Property Section of the State Bar of California.

Seyfarth partner Jim McNairy and Seyfarth attorney Joshua Salinas edited chapters in the treatise. Seyfarth attorney Anthony Orler co-authored a chapter in the treatise. Additionally, class action clerk Lauren Leibovitch provided invaluable assistance in coordinating the editing effort.

The twenty-seven chapter treatise provides a comprehensive review and analysis of California trade secret law. Written by California practitioners, the treatise explains the fundamentals and intricacies of California trade secret law. The treatise is a resource for anyone working with trade secrets in litigation or providing counsel on trade secret issues. The Third Edition includes two new chapters on digital forensics and the pursuit of trade secret claims at the International Trade Commission, as well as a model non-disclosure agreement and protective order. The new edition also provides updates of the recent case developments in the trade secret law since the 2nd Edition.

Chapters include:

•What is a Trade Secret?

•Misappropriation

•Trade Secret Protection Programs

•Advising the Corporation

•Injunctions

•Damages

•Criminal Prosecution

•Licensing Trade Secrets

•Digital Forensics

The treatise can be purchased by State Bar IP Section Members for $115 and by Non-Members for $155. Until December 15, 2014, IP Section members can get the special price of $95. Use the promo code IP Institute2014 and the discount will be applied at check-out.

As a special feature of our blog –special guest postings by experts, clients, and other professionals –please enjoy this blog entry by Bartosz Sujecki, an attorney from Bavelaar Advocaten in the Netherlands, on the European Commission’s proposed Directive to provide harmonized trade secret protections in Europe.

-Robert Milligan, Editor of Trading Secrets

By Bartosz Sujecki

The protection of trade secrets is very important for every company. At the beginning of a patent, a design or a copyright, there is an idea. The idea must be kept secret in order to enjoy the later protection. Therefore, the protection of know-how is as well essential for the protection of intellectual property rights. In the European Union, the protection level of know-how differs in the Member States. Some Member States do not have any rules regarding the protection of know-how. In only few Member States, the national laws define the term trade secrets or protect trade secrets. Additionally, the national laws of all Member States do not have the opportunity to file for a cease and desist order against infringers of trade secrets. Besides that, the rules on the calculation of damages for the infringement of intellectual property rights are inadequate for the infringement of trade secrets. In addition, the national rules do not have criminal sanctions in cases of infringement or even theft of trade secrets. Another problem of the national laws of the Member States is that they do not have any rules regarding the protections of trade secrets during litigation.

Due to the divergences in protection of trade secrets in the different national laws of the Member States, companies in the European Union have called for the introduction of harmonized rules for the protection of trade secrets within the European Union. The absence of rules regarding the protection of trade secrets is having negative effect of the Internal Market in the European Union.

On 28th November 2013, the European Commission has therefore introduced a Proposal for a Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure, COM (2013), 813 final. With the introduction of these measures, the European Commission aims to improve the effectiveness of legal protection of trade secrets in the European Union and ensure the competitiveness of European business and research bodies.

In its first Chapter, the proposal defines the scope of application as well as the meaning of trade secrets. According to article 2 of the proposal, trade secrets must have three elements in order to gain protection: First, the information must be confidential. Second, the information must be of commercial value due to the confidential character. Third, the trade secret holder should have made reasonable efforts to keep the information secret. The definition is based on the definition of “undisclosed information” as laid down in the TRIPS Agreement.

In Chapter II, the circumstances and requirements are set out under which the acquisition, the use and the disclosure of trade secrets is considered to be unlawful, see article 3 of the proposal. If these requirements are fulfilled, the holder of the trade secrets is entitled to seek the application of the measures and remedies as laid down in the proposed directive. The key requirement in this context is the absence of consent of the trade secret holder. In addition, article 3 of the proposal also determines that the use of trade secrets by a third party is as well unlawful, if that third party was aware, should have been aware, or was given notice of the unlawful act.

Chapter III of the proposal establishes the measures, procedures and remedies that the Member States shall make available to the holder of trade secrets in case of unlawful acquisition, use and disclosure of these trade secrets by a third party. Section 1 of Chapter III contains the general principles applicable to the civil enforcement instruments in order to prevent and repress acts of trade secret misappropriation, namely effectiveness, fairness and proportionality, see article 5. Article 6 of the proposal safeguards to prevent abusive litigation. An interesting provision is article 7 of the proposal, which introduces a period of limitation according to which actions for the application of the measures, procedure and remedies must be brought within at least one year but no more than two years after the date on which the applicant became aware, or had reasons to become aware, of the last fact giving rise to the action. Article 8 of the proposal aims to safeguard confidentiality of trade secrets in case of discloser within court proceedings. Section 2 provides for provisional and precautionary measures in the form of interlocutory injunctions or precautionary seizures of infringing goods.

Finally, Sections 3 of Chapter III (articles 11-14 of the proposal) provides for the measures that may be ordered with the decision of the merits of the case. Article 11 of the proposal provides for the prohibition of the use or the disclosure of the trade secrets, the prohibition to make, offer, place on the market or use infringing goods and corrective measure. The corrective measures request the infringer to destroy or deliver to the holder of the trade secrets all information he holds with regard to the unlawfully acquired, used or disclosed trade secrets. The rules regarding the compensation of damages are set out in article 13 of the proposal. The calculation of the damages is based on all the relevant factors, such as the negative economic consequences, which the injured party has suffered. However, in certain cases other than economic factors, such as the moral prejudice caused to the trade secret holder, can be taken into consideration in the calculation of the damage.

With these proposed rules, the European Commission introduced a new framework of protection of trade secrets. In general, these new instruments can be seen as an appropriate solution for the protection of trade secrets in the European Union. On aspect of the proposal needs, however, still to be adjusted. One of the key issues of the enforcement of intellectual property rights as well as trade secrets is evidence. This proposal does not contain any rules with respect to the facilitation of the burden of proof. Therefore, this proposal should be adjusted on this point.

Bartosz Sujecki, PhD, partner Bavelaar Advocaten, Amsterdam, the Netherlands.

As previously reported here, the EU Council issued its position on the directive in the spring of 2014. In general, the Council supports the Directive with some minor changes: a) the Council proposes a six–year limitation period on suing over trade secrets compared to the two years proposed by the Commission; b) the Council’s version clarifies that national laws may provide greater protection for trade secrets than that set out in the directive; and c) and the Commission’s draft required a trade secret holder to show that an alleged infringer had acted ‘intentionally’ or with ‘gross negligence’ and the Council has removed this requirement. The Council has also requested changes to allow the restricted disclosures of trade secrets during and after trade secret litigation which are broader than permitted in the Commission’s proposal.

The Directive is currently being reviewed by the EU Parliament’s Legal Affairs, Internal Market, and Industry Committees and their decisions have not been released yet. While the Parliament has not yet voted on the proposal, it is expected that the matter will be scheduled for a first reading in the Parliament during the first half of 2015.

Courts will decline to enforce contractual restrictive covenants in agreements that unreasonably restrain trade or lack adequate consideration.

Summary of the Case

Innovation Ventures (IV), developer of an energy drink, entered into contracts with a bottler and with a production consultant.  Both contracts contained non-compete and confidentiality clauses.  Shortly after the bottler’s and consultant’s business relationships with IV ended, IV sued them, together with their principals, in a state court in Michigan for breach of contract.  The trial court granted summary judgment to the defendants.  Recently, that decision was affirmed on appeal on the grounds that the agreement with the bottler unreasonably restrained competition, and the contract with the consultant lacked adequate consideration.  Innovation Ventures, L.L.C. v. Liquid Mfg., L.L.C., Case No. 315519 (Mich. Court of Appeals, Oct. 23, 2014) (unpublished).

The Parties and the Contracts

The bottler.  In 2007, pursuant to a contract with IV, Liquid Manufacturing commenced bottling IV’s “5 Hour Energy” using the bottler’s own equipment.  Three years later, the bottler, by its principal, and IV executed an agreement terminating that contract.  The termination agreement permitted Liquid Manufacturing to use the equipment for bottling other producers’ products (a) if IV gave its consent, and (b) provided that the other producers covenanted not to disclose that the equipment had been used for bottling “5 Hour Energy.”  Post-termination, Liquid Manufacturing sued the bottler and its principal for breach of contract.

The consultant.  In 2008, IV entered into an oral agreement with a consultant company to design, manufacture, and install certain production and packaging equipment for IV.  The agreement was memorialized in writing for the first time in 2009.  Less than two weeks later, IV exercised its right to end the relationship without cause.  IV then sued the consultant and its managing member for violating the restrictive covenants.

The Appellate Tribunal’s Decision

  1. The appeals court ruled that the bottler’s principal, who executed the termination agreement as an agent of the corporation, could not be sued for breach of contract because he did not sign on his own behalf. 
  2. Although the bottler may have failed to obtain the covenant described above, any such violation was held to have been cured in a timely manner. 
  3. IV’s attempt in the termination agreement to reserve to itself virtually unfettered discretion to decide which products Liquid Manufacturing could bottle constituted an unreasonable restraint on trade.  A provision reflecting the bottler’s stipulation that the termination agreement was reasonable was held to be void because courts, not the parties, determine whether contracts are unreasonable. 
  4. The confidentiality clause in the termination agreement was held to be waived by expressly authorizing the bottler to use supposedly confidential information in order to bottle competing products. 
  5. Consideration for the contract between IV and the consultant was the parties’ implied promises to continue their relationship for a reasonable period of time.  IV’s cancellation after less than two weeks was held to have nullified the contract. 

Takeaways

This decision teaches that restrictive covenants in commercial contracts are not always enforceable.  Just as with a comparable provision in an employment agreement, a non-compete clause in a commercial contract must be no more protective of a manufacturer’s good will than is reasonably necessary.  In other words, unfair competition may be restrained, but not fair competition.  The ruling also shows that purported consideration in a commercial contract must not be illusory.  Absent an express contractual provision to the contrary, a court may decline — for want of adequate consideration — to enforce a non-compete covenant in a contract which the non-covenanting party terminates without cause almost immediately after execution.

 

As many readers will know, non-compete clauses in employment contracts are only valid in France if, among other conditions, an employee receives a financial consideration of 40 to 60% salary depending on the sector and the role for the duration of the restriction. But do confidentiality clauses need to be subject to the same treatment?

The recently published decision of the High Court (SNC Adex v/ MD dated 15 October 2014) confirming that a confidentiality clause does not require any financial compensation will be met with a sigh of relief by employers employing staff in France.

“A confidentiality clause does not prevent an employee from finding another job”

This decision, though not entirely surprising, is important firstly because rulings by the High court on confidentiality clauses are rare and can be quoted by employers as authority for cases before other courts. Secondly, the circumstances of the employee were particularly interesting: the employee had argued that following his redundancy as Marketing Director (industrial explosive division), the confidentiality clause in his employment contract effectively prevented him from finding another role because he had always worked in the same niche sector where his skills are rare.  He also claimed the confidentiality clause was particularly restrictive as it was neither limited in time nor geographical scope.  All these circumstances, the employee argued, meant he was prevented from working for a competitor, and therefore in the same way that a non-compete clause operates, the contractual restrictions imposed on him should only be enforceable if he received an adequate financial compensation.

Not so. The high court disagreed with the employee’s reasoning and declared that the clause did not prevent the employee from finding another job, it just imposed on the employee a duty to keep confidential the restricted information he held regarding the company.

Key Takeaways – Confidentiality clauses are a must have

The decision of the High court is good news for employers, particularly given the facts at stake.  Employers should therefore be encouraged to include a robust confidentiality clause in the employee’s contract in France and ensure the confidentiality obligations are reconfirmed at the time of termination. Even though there is an implied duty to keep information confidential during the employment contract, this duty falls when the employment contract expires, and the confidentiality clause which needs to be expressly agreed by the employee prior to the termination will be helpful to protect the employers interests when parting with the employee.

Currently only non-compete clauses are subject to a financial compensation in an employment contract.  It will be interesting to see whether, like confidentiality clauses,  non-solicitation clauses that apply post termination also continue to be exempt from any financial compensation.

A company faced with a security breach has a lengthy “to do” list, things to accomplish with respect to its incident response plan. It must, among other things, determine the root cause of the vulnerability or breach, investigate and eliminate the vulnerability or breach, determine the full nature and extent of the breach, determine who to notify and finalize the notifications.

If the American Postal Workers Union (APWU) has its way, a unionized employer facing a security breach involving employee personal information would have yet another responsibility – bargaining over the impact of or response to the security breach.

The asserting that the United States Postal Service sent notice of the breach to employees on November 10, 2014, and offered the employees free credit monitoring for 1 year, but “did not give the Union advance notice that would enable it to negotiate over the impact and effects of the data breach on employees.” The Union’s complaint further states that by providing free credit monitoring, the USPS made a unilateral change in wages, hours and working conditions.  Under the various state database security notification laws and the HiTech provisions of HIPAA, employers that encounter a breach of personal information regarding employees, must, absent certain exceptions, notify the affected employees (or for a HIPAA breach, plan participants), as well as potentially notify regulators and others.

There is no legal requirement in the United States that companies must consult with their employees regarding the investigation and/or impact of a security breach involving employee data. In fact, it is important that information concerning potential security incidents be maintained confidential so that the investigation is not compromised. Therefore, the APWU is taking a novel, unprecedented stance in claiming that the USPS had an obligation to be at the table and bargain over what actions USPS would take with respect to investigating and/or remediating a breach.

Although it will be several months (at the earliest) before the NLRB issues any type of ruling or guidance on this matter, employers should consider this type of communication should a data breach occur.  In other words, while not legally required, it is certainly important and prudent for a company to consider all stakeholders in determining how to respond to a security breach. The goodwill of a company, and its relationships with employees and customers are  extremely valuable.

Since the wrong internal or external communications concerning a breach can have a significant impact on how actual and potential customers and employees, as well as shareholders, perceive the company we recommend that every incident response plan include a company’s public relations and communications experts in order to make sure that the proper groups are properly informed as to the status of a security incident and the measures a company is taking to protect affected individuals.

At some point in his or her legal education, every law student discovers one of the more strikingly unique rules about the profession that he or she aspires to enter.  Unlike laws governing physicians, accountants, engineers, and virtually all other professions, rules governing the practice of law impose a nearly absolute prohibition on lawyer non-compete agreements.  At the same time, the law imposes on lawyers nearly ironclad obligations of confidentiality that generally do not apply to other types of professionals and business people.

Despite — or, perhaps, because of — these unique rules, protection of trade secrets in the legal profession poses unique challenges for both law firms and companies.  In fact, during the past year, several cases delving into these topics have generated considerable buzz in the legal community, from Schlumberger Ltd.’s suit against its former deputy general counsel for alleged trade secrets theft to a widely publicized lawsuit by Elliott Greenleaf & Siedzikowski against a former partner for alleged hacking of computer files.

The irony, of course, is that attorneys are hired every day to enforce or seek to block enforcement of non-compete agreements and other post-employment restrictive covenants, yet they are not subject to such agreements themselves.  Indeed, while no universal black letter law defines what lawyers can and cannot do in this regard, courts and bar associations facing this issue generally apply a balancing test to ensure that a lawyer’s conduct comports with the rules of professional conduct, that client interests are protected, and that there is promotion of fair and open opportunities for lawyer competition.  These considerations apply whether the putative restriction applies to in-house or outside counsel.  Nevertheless, the overwhelming weight of authority appears to be that attorneys—in-house or outside counsel—are not subject to post-employment restrictive covenants other than under the most exceptional circumstances.

On December 4, 2014, Seyfarth Shaw attorneys will discuss these timely issues at the American Intellectual Property Law (“AIPLA”) 2014 Trade Secret Law Summit in Santa Clara, California.  At  the summit, Erik Weibust (Boston) and Dan Hart (Atlanta) will present “Lawyer Mobility and Trade Secrets Protection:  Restrictive Covenant, Confidentiality, and Non-Disclosure Considerations in the Legal Profession,” a paper they co-authored with Seyfarth associates Robyn Marsh (Chicago) and Andrew Masak (Atlanta).  Among other topics, the presentation will discuss:

  • ABA Model Rules of Professional Conduct 1.6 and 5.6 and their impact on lawyer mobility,
  • Recent cases and ethical decisions (including ethics opinions from the State Bars of New York, New Jersey, Illinois, Washington, and other jurisdictions) on lawyer restrictive covenants,
  • Application of ethical rules on lawyer non-competes in the in-house context, and
  • Practical considerations for protecting trade secrets and enforcing restrictive covenants in the legal profession.

Registration and additional information about the event can be found here.