A Utah federal judge recently held that a jury’s compensatory damages award of $2.92 million for misappropriating trade secrets was supported by the evidence and was not excessive. Because the jury found by clear and convincing evidence that the misappropriation was willful and malicious, the court added $1.46 in exemplary damages. The total verdict: $4.38 million. Storagecraft Technology Corp. v. Kirby, Case No. 2:08-CV-921 (D.Utah, Sept. 27 and Dec. 4, 2012) (appeal pending).

STC developed and obtained a copyright on a source code. The company went to considerable lengths to maintain the code’s secrecy. No one could access the company’s technology without signing a confidentiality agreement, obtaining a license, and agreeing to pay a royalty. Kirby, a software engineer, resigned as a STC employee in late 2004. Shortly before he quit, he informed the company that he had stored the source code and related files on his laptop and desktop. When STC’s attorney communicated with him about returning this intellectual property, he responded that it would be deleted or returned. Not trusting him, the company sued him for misappropriation.

As part of the 2005 settlement of the case, Kirby represented and warranted that he had returned all of STC’s intellectual property. In addition, he promised that he would not use or disclose such property, and that he would cooperate with STC in preserving it. One year later, Kirby delivered to a company he knew to be a STC competitor and lawsuit adversary his entire backup file containing the source code and 100,000 emails he had sent or received while a STC employee.

When STC learned about this delivery, it sued Kirby for misappropriation, breach of contract and copyright infringement. At trial, evidence was introduced supporting STC’s claims, including a charge that Kirby was motivated by a desire to harm the company. The Utah Trade Secrets Act permits the use of a reasonable royalty as a basis for the computation of damages for trade secret misappropriation. STC’s trial expert testified that a reasonable royalty for an unrestricted license to the company’s source code was at least $4.5 million.

The jury discounted the expert’s calculations and awarded $2.9 million in compensatory damages. Based on the jury’s finding that Kirby had maliciously injured STC, the court added exemplary damages in an amount equal to 50% of the jury’s award. Kirby is appealing the judgment.

In a post-trial motion, Kirby argued that the jury verdict was contrary to the clear weight of the evidence, and that the compensatory damages award “was excessive, unreasonable, and should shock the conscience of [the] Court given the lack of evidence that Kirby proximately caused any ‘actual injury or loss’ to STC.” The court rejected Kirby’s argument and stated: “The very essence” of the parties’ prior settlement agreement “was Kirby’s covenant to return and protect all STC Intellectual Property.”

The ruling is of particular interest because, by upholding the reasonable royalties method of computing damages for misappropriation of trade secrets, STC did not have to show that Kirby actually profited from his misconduct (although there was evidence that the competitor to whom he disclosed STC’s trade secrets paid him a salary of $15,000 per month for some unspecified period). Moreover, STC was not required to prove what the competitor would have been willing to pay, if anything, for use of the confidential data.

According to a recent Arizona federal court decision, (a) an employee who had the right to access his employer’s confidential emails did not violate the federal Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030, by downloading 300 such documents to his personal computer and sharing them with a recently terminated employee; (b) an employer may pursue either a misappropriation claim under the Arizona Uniform Trade Secrets Act (AUTSA), or statutorily pre-empted causes of action based on the same facts; and (c) a rule to show cause is appropriate where the defendants violated a 48-hour deadline to return the employer’s confidential documents. Food Services of Amer. Inc. v. Carrington, No. CV-12-00175-PHX-GMS (D. Ariz., Nov. 8, 2012).

Because of the holding in U.S. v. Nosal, 676 F.3d 854, 863-64 (9th Cir. 2012), the Carrington case defendants cannot be sued in the Arizona federal court for a CFAA violation (of course, both individuals may be liable for non-CFAA causes of action). Nosal, which is binding on that court, held that an employee who was authorized to access the employer’s computerized records did not violate the CFAA by downloading and distributing them to unauthorized persons. Some other circuit courts of appeal decisions conflict with Nosal. See, e.g., several cases cited there — including International Airport Centers, L.L.C. v. Citrin, 440 F.3d 418, 420-21 (7th Cir. 2006) (breach of duty of loyalty terminates authorization to access employer’s computer data and, therefore, violates CFAA) — and criticized.

The AUTSA pre-empts all claims based on the same facts as the misappropriation cause of action (regardless of whether what was misappropriated was a trade secret or merely confidential information). However, according to the court in Carrington without citation of authority, pre-emption means that the employer must choose whether to sue for an AUTSA violation or for pre-empted claims. This holding is puzzling. Several cases hold that causes of action pre-empted by a uniform trade secrets act are abrogated. See, e.g., CDC Restoration & Constr. v. Tradesmen Contractors, LLC, 274 P.3d 317 (Utah App. 2012) (the “preemption provision [in a UTSA] has generally been interpreted to abolish all free-standing alternative causes of action for theft or misuse of confidential, proprietary or otherwise secret information”).

In response to their ex-employer’s motion for entry of a rule to show cause why the defendants should not be held in contempt for late production of the employer’s documents, the defendants asserted that they had located and produced the documents only a few months after expiration of the deadline for doing so. They professed to having committed a “relatively minor technical infraction” as a result of “a misunderstanding between counsel and defendants.” The court was unforgiving because the “defendants’ response fails entirely to comprehend the serious nature of violating a court order.” That ruling contains a loud and clear message concerning the potential adverse consequences to a party for failing to produce misappropriated confidential documents as ordered by a court, no matter how abbreviated the time allowed for doing so.

In sum, the Carrington decision should send shivers down the spine of a former employee who misappropriated his employer’s proprietary information. In some circuits the former employee may escape CFAA liability for misdeeds occurring before termination, but regardless he may be hit with an expensive lawsuit and a monetary judgment.

By Robert Milligan and Jessica Mendelson

With the NBA basketball season almost upon us, a high profile legal battle between an aspiring NBA sports agent and his former agency continues to heat up in Los Angeles federal court. The case involves some interesting non-compete, trade secret, and privacy issues.

In April 2012, we first alerted you to the colorful case of Mintz v. Mark Bartelstein & Associates d/b/a Priority Sports & Entertainment, Case No. 12-02554 SVW (SSX), (C.D. Cal.), where Aaron Mintz, a National Basketball Players Association (NBPA) certified player-agent, brought a declaratory relief suit seeking to invalidate his non-compete agreement with his former employer, Priority Sports & Entertainment (“Priority”).

Mintz, based in Los Angeles, left Priority in March 2012, accepted a position with competitor Creative Artists Agency (“CAA”), and immediately sought declaratory relief to invalidate his two year non-compete agreement.

As the case has progressed, Mintz has added additional claims against Priority for violations of the Computer Fraud and Abuse Act, the Electronic Communications Act, and California Penal Code section 502, as well as claims for defamation, invasion of privacy, intentional inference with contractual relations, and violation of Business and Professions Code section 17200. Mintz has also asserted some of the claims against Priority principle Mark Bartelstein.

Mintz alleges that he worked eleven years for Priority and then decided to pursue a better opportunity with CAA. Apart from the two year non-compete, which he claims violates Business and Professions Code section 16600, Mintz claims that the fourteen-day notice of termination provision in his employment agreement violates section 16600 as well. Mintz claims that the notice provision restricts his ability to terminate his employment, and thereby prevents him from competing with Priority, at its discretion, for two weeks after termination in violation of California law.

The non-compete contains an Illinois choice of law provision but no separate action to attempt to enforce it has been initiated in Illinois to date.

Mintz also claims that after he resigned Priority hacked his personal email account, reviewed his contract with CAA, and disclosed its terms to third parties. He also claims that defamatory statements were made to basketball executives, players, and family members of players to persuade players not to follow Mintz to CAA. Among some of the NBA players on the parties’ joint witness list are Dominic McGuire, Jordan Crawford, Paul George, Danny Granger, and Acie Law.

Priority counterclaimed against Mintz asserting claims for breach of contract, breach of covenant of good faith and fair dealing, breach of duty of loyalty, misappropriation of trade secrets, intentional interference with contractual relations, intentional interference with prospective economic advantage, conversion, violation of California Penal Code section 502, defamation, trade libel, conspiracy, and unfair competition. Priority has also asserted some of the claims against CAA.

Priority alleges that under his employment agreement Mintz was required to provide Priority fourteen days’ notice prior to his termination. Instead, Priority alleges that Mintz immediately terminated his employment and filed suit against Priority depriving it of “its negotiated opportunity to communicate with its clients before Mintz’s departure and to attempt to retain their business and manage an orderly transition process.” Priority claims that Mintz formulated a strategy designed to keep Priority from learning of his plans to join CAA in order to give CAA an unfair advantage in its efforts to attract several of Priority’s clients. Priority also alleges that Mintz disclosed information regarding Priority’s contracts with its NBA clients and used confidential information to solicit Priority’s clients. In essence, Priority claims that Mintz and CAA conspired to steal Priority’s clients.

Mintz has brought a motion for summary judgment on his claims and Priority’s claims, along with CAA. Priority brought a motion for partial summary judgment on its claims against Mintz for breach of contract and breach of duty loyalty. The summary judgment hearings are set for October 29, 2012 along with the pretrial conference. The trial is set for November 13, 2012 before the Honorable Stephen Wilson.

Mintz claims in his opposition papers, among other things, that Priority’s duty of loyalty claim fails because California employees have every right to take preparatory steps to look for a new job and consult an attorney to protect one’s legal rights without violating their duty of loyalty to their existing employer. He also claims that Priority’s trade secret claim fails because, among other things, client names, contact information, contract terms and commission splits with third party handlers do not qualify for trade secret protection.

It will be interesting to see how the court addresses the notice of termination provision and section 16600 argument as some employers use notice provisions in their employment agreements, particularly with executives. Additionally, the court may provide some guidance on what trade secrets, if any, exist, in the context of a sports agent dispute, as well as what other information may be protectable under a contract theory.

One interesting discovery issue handled by Magistrate Judge Segal in the case involved Priority’s attempt to obtain Mintz’s phone records from a smart phone he used during his employment with Priority.

Priority subpoenaed Mintz’s phone records from the cellular provider, seeking ten categories of documents, including dates, times, originating and receiving telephone numbers, as well as the text messages from the cellular phone. In response, Mintz filed a motion to quash the subpoena, arguing that it was overbroad and sought confidential information. Priority argued the information was necessary to prove their counterclaims that Mintz had made false and defamatory statements regarding Priority and improperly solicited Priority’s clients. Furthermore, Priority argued that Mintz lacked an expectation of privacy in the phone, since Priority argued it owned and paid for the telephone account. Additionally, Priority argued that by acknowledging an employee manual stating that “personal information on company telephones shall be the property of Priority Sports,” Mintz waived any right to privacy he might have had.

Ultimately the court granted the motion to quash with respect to the content of the text messages, but denied the motion to quash with respect to the non-content information, which consisted of the dates, times, and telephone numbers for specific calls during a relevant period.

Under the Stored Communications Act (“SCA”), communication service providers are traditionally prohibited from divulging private communications to certain entities or individuals. The SCA does not contain an exception for civil discovery subpoenas. However, under the SCA, communication providers can divulge “non-content information to non-governmental entities.” According to the court, the bulk of the information requested in the subpoena was subscriber information, rather than the content of the messages. Furthermore, the court reasoned that since Priority was not a government entity, the information was “not barred from disclosure” under the SCA.

With respect to the content of the text messages, the court granted the motion to quash. The court ruled, however, that while Priority could not obtain the messages directly from the provider, it could obtain the messages directly from Mintz pursuant to a document request under Federal Rule of Civil Procedure 34, subject to Mintz’s privacy objections, which were not before the court. According to the court, the information was within “Mintz’s control” and could be obtained by Mintz from the provider.

The court also addressed Mintz’s privacy interest in the non-content information. Judge Segal reasoned that the phone started out as Mintz’s personal phone, but eventually became his business phone. Since the phone was used for business purposes, the court reasoned that Mintz had a limited expectation of privacy in the non-content information, and a protective order could be used to guard against any unwarranted intrusion into his privacy. Please see Eric Goldman’s blog for a more detailed discussion of Judge Segal’s ruling and SCA developments.

For litigants in trade secret and non-compete cases, the ruling is important because it provides guidance concerning discovery directed to probing allegations of solicitation, trade secret misappropriation, and other business and privacy torts. It is also an important reminder for employers to have strong policies that provide for ownership interests in company smart phones as well as that permit employer monitoring of company owned devices. The court credited those facts in requiring the production.

We will continue to follow this case, and keep you apprised of future developments as it moves towards the November trial date.

During the past week, federal courts around the country have seen a handful of high profile pleas, convictions and sentencing in cases in which defendants are accused of stealing their former employer’s trade secrets. 

On May 7, 2012, Yuan Li, a former research scientist with Sanofi Aventis, who had pled guilty to one count of violating 18 U.S.C. § 1832 (the section of the Economic Espionage Act dealing with commercial economic espionage) in January 2012, was sentenced to 18 months in prison by the United States District Court for the District of New Jersey. In pleading guilty, Li, a Chinese national, admitted to stealing data on Sanofi’s compounds, including their chemical structures, and sending that data via email or through use of a thumb drive to her home computer. Li was also ordered to pay $131,000 in restitution damages to Sanofi.

Later that same week, on May 9, 2012, the United States District Court for the Northern District of California convicted former Silicon Valley engineer, Suibin Zhang, of five counts; three counts for his theft and copying of trade secrets and downloading the trade secrets from a secure database, one count for duplication of trade secrets, and one count for possession of stolen trade secrets. This verdict followed a two-week bench trial before Judge Ronald M. Whyte, which concluded on November 9, 2011.

The evidence presented against Zhang during trial showed that, while employed as a project engineer for Netgear, Inc., he accessed the secure database of Marvell Semiconductor, Inc., downloading information with the intent of using that information after accepting a job at Marvell’s chief competitor, Broadcom Corporation and later loading Marvell’s trade secret information onto his Broadcom laptop. Zhang will be sentenced on August 27, 2012, and could face 10 years in prison, up to $250,000 in fines, plus restitution damages to Marvell if the court deemed such restitution damages appropriate.

Also last week, on May 11, 2012, former Frontier Scientist Inc. chemist, Prabhu Mohaptra, entered a guilty plea in the United States District Court for the District of Utah, pleading guilty to one count of unlawful access to a protected computer. Mohaptra’s guilty plead was in exchange for the government dropping 25 other charges against him. 

Mohaptra admitted to improperly accessing Frontier’s chemical resource notebook and emailing certain chemical formulas to his brother-in-law in India. Mohaptra’s case marks the first time that the Economic Espionage Act was used to prosecute a case in Utah. Mohaptra is scheduled for sentencing on August 28, 2012, at which time he faces up to five years in prison.

Each of these cases highlight the need for companies to monitor the access of its employees to secure databases. Companies should consider using additional preventive means to prohibit employees from stealing trade secrets, such as configuring the operating system to restrict access to external devices, thus, restricting the ability to download information to an external device; blocking a user from uploading information to a web-based site; and/or utilizing software that blocks employees from sending emails to certain domain names. In situations like this, companies may also wish to consider placing blocks on the ability of its employees to email certain domain names that are known to be used for personal email accounts. In an era in which data is becoming increasingly portable, companies much increase their vigilance in monitoring use and exporting of its data and trade secrets.

By Robert Milligan and Jeffrey Oh

In its order denying defendants’ motion to dismiss in SBM Site Services, LLC v. Garrett, et al., Case No. 10-cv-00385, a Colorado federal court identified a circuit split over the interpretation of “unauthorized access” under the Computer Fraud and Abuse Act and then found a former employer had stated a CFAA claim against a former executive and his new employer regardless of the different circuit interpretations based upon his post-termination computer activities. The case is significant because it provides employers with authority that the CFAA should apply in cases where an employee steals or destroys company data on a company computer after his or her termination.

Pertinent Allegations

In its ruling, the court laid out the pertinent allegations which it accepted as true for purpose of ruling on defendants’ motion.  According to the complaint, defendant John Garrett, formerly the Senior Vice President/Chief Business Development Officer at SBM, a janitorial, recycling, and moving services company, worked remotely from home using two desktop computers and two laptop computers provided to him by SBM.  He used these SBM-provided devices to remotely access SBM’s computer system.  Prior to his move to Able, a direct competitor of SBM, Garrett allegedly had his administrative assistant download numerous SBM files from its network, had them burned to a cd, and then had them sent to him. 

According to the amended complaint, on January 4, 2010 Garrett informally notified SBM that he was resigning effective January 22, 2010.  SBM then informed Garrett that he would need to return all SBM property, including computers, records and other confidential information, before his departure.  After failing to return the company computers at an initial meeting on January 26, 2010, SBM scheduled another meeting for January 29, 2010 to collect the items.  Garrett allegedly canceled this second meeting and did not return the last of his company computers until February 16, 2010, over two weeks after starting his new job at Able.  Garrett began his employment with Able on January 28, 2010 and SBM alleges that Garrett loaded SBM’s confidential information onto a laptop provided to him by Able.   Upon examination of the returned laptop, SBM allegedly found that the hard drive had been encrypted to prevent access in addition to being “intentionally erased.”  SBM asserted several claims against Garrett and Able, including violation of the CFAA.

CFAA and Circuit Split

As with most cases where the CFAA is invoked, the question of what constitutes unauthorized access is central to the arguments made by both sides.  Section 1030(a)(5)(C) of the CFAA makes it unlawful to “intentionally access[] a protected computer without authorization and as a result of such conduct, cause[] damage and loss.” Garrett argued that because he was authorized to access the laptop while he was employed by SBM, he cannot have accessed the laptop without authorization. 

The court acknowledged that the Tenth Circuit has yet to address what constitutes “unauthorized access” for purposes of the CFAA. The court analyzed differing interpretations of the provision made by the Seventh and Ninth Circuits.

In its interpretation of what constitutes “unauthorized access,” the Seventh Circuit applied agency principles in International Airport Centers, LLC v. Citrin to determine that an employee’s access was unauthorized from the moment he decided to quit and had undertaken actions in violation of his duty of loyalty to his employer.  According to the decision, access is only authorized within the agency relationship between employer and employee.  This agency relationship relies on loyalty as well as transparency, and violating the duty of loyalty, or failing to disclose adverse interests, voids the agency relationship. Under the Seventh Circuit’s approach, whether access to a computer was “unauthorized” depends upon the status of the agency relationship between the employer and employee.

The Colorado federal court noted that the Ninth Circuit has taken a more restrictive view of what constitutes “unauthorized access” for purposes of the CFAA. In LVRC Holdings LLC v. Brekka, the Ninth Circuit determined that “authorization” depends on actions taken by the employer and “[i]f the employer has not rescinded the defendant’s right to use the computer, the defendant would have no reason to know that making personal use of the company computer in breach of a state law fiduciary duty to an employer would constitute a criminal violation of the CFAA.”  In other words, unless an employer rescinds an employee’s right to use or access a computer, the employee arguably has authorized access to all systems and files within the scope of their position.  Thus, the onus is on the employer to end an employee’s right to access by explicitly informing them of such.  It is notable that the Colorado federal court’s decision does not address the exceeds authorized access section of the CFAA, which provides an alternative theory of liability under the CFAA. An en banc panel of the Ninth Circuit is presently considering that section in U.S. v. Nosal and will issue a decision soon.

Continue Reading Colorado Federal Court Rules That Former Employer Stated A Claim Against Former Executive and His New Employer Under The Computer Fraud Abuse and Act Regardless Of Differing Circuit Interpretations Of The Act

By Scott Schaefers

On February 6, 2012, a federal court in Oakland, California denied the popular Facebook application “Farmville” operator’s (Zynga, Inc.) motion to dismiss several claims brought by the inventor of “myFarm” (SocialApps, LLC, or “SA”)) for alleged theft of the source code, game images, and “concepts and features” used in the myFarm app. The court allowed SocialApps to proceed with its claims that Zynga took SA’s trade secrets, and breached implied contracts, “covenants of good faith and fair dealing,” and SA’s “confidences” in connection with a pre-acquisition non-disclosure agreement. In doing so, the court paved the way for SA to hold Zynga liable for allegedly betraying SA’s unwritten, but clearly implied, trust and confidence it placed in Zynga while the two discussed Zynga’s buyout of myFarm.

SA alleged that it launched myFarm the first-ever virtual farming game, in November 2008 on Facebook. The application thereafter attracted millions of users. In May 2009, in anticipation of Zynga’s acquisition of myFarm, Zynga and SA entered into a written confidentiality agreement to protect SA’s assets while Zynga conducted its due diligence. Within a month, however, Zynga used SA’s source code, game images, and other “concepts and features” to launch FarmVille, all without buying the rights or obtaining SA’s consent. Using the ruse of "due diligence," Zynga allegedly had SA produce its confidential source code and other information for ‘myFarm,’" which Zynga allegedly use in "FarmVille," the complaint said.

In June 2011, SA sued Zynga, making six claims for copyright infringement, statutory trade secrets theft, breach of contract, breach of “implied contract,” breach of confidence, and breach of implied covenant of good faith and fair dealing, and later adding a seventh claim for “unjust enrichment.” In October 2011, Zynga asked the court to dismiss SA’s claims for trade secrets theft, breach of implied contract, breach of confidence, and implied covenant of good faith. Zynga argued that SA’s alleged trade secrets were on the internet, and thus not secret; that the claims breach of implied contract, confidence, and implied covenant of good faith were duplicative of the written contract claim, and that the California Trade Secrets Act preempted the breach of confidence claim.

The court largely rejected Zynga’s arguments, at least at the preliminary stages of the case. The court did strike SA’s trade secrets theft claim, but only insofar as it based the claim on any of myFarm’s publicly available images and features. 

"As [SocialApps] has alleged, the ‘myFarm’ game was publicly released in November 2008, and therefore the images and features were visible to the public several months before the May 2009 letter agreement or June 2009 release of ‘FarmVille,’" the Court wrote. The "images and features" component of SocialApps’ trade secrets claim will therefore be stricken, leaving the "proprietary source code" component alive, the judge ruled.

The court upheld the trade secrets theft claim to the extent it was based on SA’s source code, and upheld the other implied contract, confidence, and implied covenant of good faith confidence claims. In essence, the court held that SA could be held liable for violating not only the letter of the May 2009 non-disclosure agreement, but also its spirit. 

Also of note is the court’s holding that, at least at this stage, that SA’s breach of confidence claim was not preempted by the Trade Secrets Act. The court held that to the extent SA based its confidence claim on Zynga’s unauthorized use or disclosure of myFarm’s “concepts and/or game features” that did not involve SA’s proprietary source code underlying its trade secrets theft claim, SA stated a valid information-theft claim separate from a trade secrets violation.  The decision is consistent with other courts’ recent decisions that a plaintiff may maintain an independent common law claim for information theft, at least at the pleading stage. (i.e. Amron Int’l Diving Supply, Inc. v. Hydrolink Diving Comm., Inc., No. 11-cv-1890-H (JMA), 2011 U.S. Dist. LEXIS 122420, at * 25-27 (S.D. Cal. Oct. 21, 2011). 

We will continue to monitor this interesting new case.

     

In Eastman Chemical Company, v. Alphapet Inc., et al., Civ. Action No. 09-971-LPS-CJB 2011 U.S. Dist. LEXIS 127757 (Dist. DE) (November 4, 2011) (unpublished) Plaintiff Eastman Chemical Company ("Eastman" or "Plaintiff’) filed an amended complaint alleging patent infringement, breach of contract and trade secret misappropriation.  Plaintiff alleged that former Eastman employees at the direction of one or more of the Defendants, improperly disclosed Eastman’s confidential, proprietary, and trade secret information relating to the manufacture of certain products in violation of a technology license agreement.  Defendants moved to dismiss the trade secret misappropriation claim based on a failure to specifically plead this claim.  

Defendants argued that Plaintiff’s claim for trade secret misappropriation failed to satisfy the pleading standard of Fed. R. Civ. P. 8 in three principal respects.  First, Defendants asserted that the amended complaint failed to identify which of the Defendants allegedly obtained Eastman’s trade secrets, and which individuals were involved in the allegedly illicit disclosure and use of that information. Second, Defendants argued that the description of the trade secrets that were allegedly used or disclosed is "so broad as to be meaningless."  Finally, Defendants contended that "Eastman failed to adequately plead that any [particular] defendant actually used or disclosed" any trade secrets.  

For purposes of its analysis, the Magistrate Judge considered case law from other states that have adopted the Uniform Trade Secrets Act to be persuasive authority.  Viewing Plaintiff’s misappropriation claim and the associated facts in the light most favorable to Plaintiff, the Magistrate Judge found that Defendants had not shown that this misappropriation claim should be dismissed pursuant to Rule 8.   Having outlined and considered the contours of Plaintiff’s factual allegations, the Magistrate Judge found that Defendants have been given sufficient factual information to provide adequate notice of the plausible grounds for Plaintiff’s misappropriation claim under the Twombly/lqbal standard.
 

An article published yesterday in the Gonzaga Law Review presents an interesting analysis of trade secret litigation in state courts. Authors David S. Alming, Darin W. Snyder, Michael Sapoznikow, Whitney E. McCollum, and Jill Weader published the follow-up article to their article last year concerning trade secret litigation in federal courts. According to the new article, they analyzed 2,077 state appellate court decisions issued between 1995 and 2009 and coded 358 of them for 17 relevant factors.

Here are some interesting findings from their article:

• In more than 90% of trade secret cases in both state and federal courts, the alleged misappropriator was either an employee or business partner of the trade secret owner.
• Just five states account for about half of all trade secret litigation in state appellate courts. California leads the pack (16% of cases), followed by Texas (11%), Ohio (10%), New York (6%), and Georgia (6%).
• State appellate courts affirmed 68% of trade secret decisions and reversed 30% of them.
• State appellate courts favor defendants. Alleged misappropriators (the defendants) prevailed in 57% of cases and trade secret owners (the plaintiffs) prevailed in 41%.
• State courts appear to be a tougher venue for trade secret owners who are suing business partners than for those suing employees. Trade secret owners won 42% of the time on appeal when the owner sued an employee, but only 34% when the owner sued a business partner.
• For decades following its 1939 publication, the Restatement (First) of Torts “was almost universally cited by state courts, and in effect became the bedrock of modern trade secret law.” James Pooley, Trade Secrets § 2.02[1] (2010). Those days are over. Only 5% of the cases in the state study cited the Restatement.
• Unlike federal courts, which cite persuasive authority in more than a quarter of cases, state courts cited persuasive authority in only 7% of cases.
• In contrast to the exponential growth of trade secret litigation in federal courts, trade secret litigation in state appellate courts is increasing, but only in a linear pattern at a modest pace.
• Of all the reasonable measures trade secret owners took, only two statistically predicted that the court would find that this element was satisfied: confidentiality agreements with employees and confidentiality agreements with third parties.