Seyfarth Synopsis: The New Jersey Legislature recently passed Senate Bill 121 affecting claims of discrimination, harassment, and retaliation, which if signed into law, would render any prospective waiver of rights against public policy, including pre-dispute mandatory arbitration agreements. In addition, non-disclosure provisions in settlement agreements involving these claims would be unenforceable against employees.
The Attorneys General of ten states are investigating fast food franchisors for their alleged use of “no poach” provisions in their franchise agreements, according to a press release by the New Jersey Attorney General’s Office, and as reported by NPR. In a July 9, 2018 letter, the Attorneys General for New Jersey, Massachusetts, California, Washington, D.C., Illinois, Maryland, Minnesota, New York, Oregon, Pennsylvania, and Rhode Island requested information from eight fast food companies about their alleged use of such provisions. The letter states that the Attorneys General “have learned that certain franchise agreements used in our States and the District of Columbia . . . may contain provisions that impact some employees’ ability to obtain higher paying or more attractive positions with a different franchisee.” In other words, the agreements purportedly prohibit one franchisee of a particular brand from hiring employees of another franchisee of the same brand. Continue Reading State Attorneys General Investigate Fast Food Franchisor “No Poach” Agreements
Touzot was an employee of ROM, a seller of products used in making balsa wood model planes and boats. His employment agreement included a post-termination customer non-solicitation covenant. After he left ROM, he became a competitor. The company sued him and his Ecuadorian supplier of balsa wood, which previously had been ROM’s supplier, alleging that they were colluding to steal ROM’s customers. Although ROM was found to have satisfied most of the other requirements for injunctive relief, the court held that a monetary award would provide adequate compensation for any damages. Touzot v. ROM Dev. Corp., Civ. Ac. No. 15-6289 (D.N.J., Apr. 26, 2016) (Linares, J.) (not for publication).
Status of the case. Touzot initiated litigation in a New Jersey state court against ROM. The company is based in Rhode Island. ROM removed the case to federal court and moved to dismiss for lack of personal jurisdiction. While the motion was pending, ROM filed its own lawsuit in Rhode Island federal court, charging breach of contract, misappropriation of trade secrets, tortious interference, etc. ROM sought and obtained from the judge in Rhode Island a temporary restraining order, but it was stayed pending a determination of which court should adjudicate the dispute.
After ROM’s motion to dismiss the New Jersey case was denied, the Rhode Island suit was transferred to New Jersey for consolidation with the case there. A few days ago, Judge Linares issued his opinion denying ROM’s application for a preliminary injunction and granting the motion filed by Touzot and his balsa wood supplier to dissolve the TRO.
Background. By 2011, ROM had sustained a sharp decline in the volume of its quite profitable sales of balsa wood products, partly because of a shortage of balsa wood. Hoping to improve its sales, ROM hired Touzot who introduced the company to a supplier in Ecuador which had abundant quantities of balsa wood and became ROM’s principal source. Touzot was ROM’s contact person with the supplier as well as ROM’s sales representative for its model wood customers (according to ROM, the customers, unlike the supplier, previously were unknown to Touzot).
Once ROM had an adequate supply of balsa wood, its model products sales took off. Nevertheless, after four years the company fired Touzot who then formed his own company to sell balsa wood model products. ROM’s supplier announced dramatically increased prices for sales of balsa wood to ROM, which would have eliminated its profits for wood model products. However, the supplier sold balsa wood to Touzot at the old, lower prices. Other suppliers of balsa wood did not raise their prices but, as before, they did not have the capacity to satisfy ROM’s needs. Consequently, the company could not compete effectively with Touzot, and many of its former customers became his customers.
The restrictive covenants. Touzot’s employment agreement with ROM contained multiple restrictive provisions (non-compete, non-solicitation, trade secret confidentiality, etc.). The only covenant ROM sought to enforce with an injunction was Touzot’s promise that for two years after termination he would not solicit anyone in “the Americas” who was a ROM customer during his employment for orders with respect to products similar to those sold by ROM.
Injunction standards. In his opinion, Judge Linares stated that, whether New Jersey or Rhode Island law applied, ROM was required to show that (1) it was likely to succeed on the merits, (2) the balance of equities favored ROM, (3) an injunction was in the public interest, and (4) ROM would suffer irreparable harm if the injunction were not issued. He wrote that ROM was likely to be able to prove that Touzot solicited its customers, and that he sold products substantially similar to those it sold. The time and geographical restrictions were found to be reasonable. Touzot was said to have admitted that he could obtain employment without violating the non-solicit restriction and simply chose not to do so. However, regarding the fourth prong, the judge ruled that if ROM could prove lost sales as a result of Touzot’s covenant violations, a monetary award would provide adequate relief.
Takeaways. The same evidence admitted at an injunction hearing frequently is offered at a subsequent trial on the merits, and the ruling on a motion for entry of a preliminary injunction often is a good predictor of the likely judgment at trial. For these reasons, many cases settle after an injunction hearing and ruling. Of course, Judge Linares stressed that his decision applied solely to the motion for preliminary injunctive relief and was not dispositive with respect to the merits of (a) the parties’ differing interpretations as to the meaning of the non-solicitation covenant, much less (b) ROM’S allegation that Touzot breached it.
The court did not really address the public interest prong of the injunction standards. Yet, if Touzot is enjoined from selling to model wood customers for two years, they might be unable to locate an alternative source for the product during that period. On the other hand, there is a public interest in holding contracting parties, especially relatively sophisticated parties, to the contractual commitments they make.
In his opinion, Judge Linares pointed out that monetary relief is rarely adequate for breach of a confidentiality covenant which puts another’s trade secrets into the public domain. On the other hand, many courts recently have denied motions for injunctions with respect to violations of various covenants, holding that compensatory damages can be an adequate remedy when the injury consists of provable lost sales and profits.
In a recent ruling, the New Jersey Supreme Court gave employers a great recourse for dealing with former employees who breach their duty of loyalty. In Bruce Kaye v. Alan P. Rosefielde, the Court allowed an employer to recover compensation paid to a disloyal, recently terminated, employee, even where the employer sustained no economic hardship from the employee’s acts of disloyalty.
In Kaye, the employee, an attorney, who was only licensed to practice in New York, was hired as Chief Operating Officer (“COO”) and General Counsel for plaintiff’s business selling and managing timeshares in Atlantic County, New Jersey. Interestingly, although the defendant’s contract refers to his salary as a retainer for his services, and it appeared that both parties intended defendant to be an independent contractor, both parties agreed that defendant performed the services of an employee rather than an independent contractor.
While employed in the hybrid COO/General Counsel role — earning a salary of $500,000 per year — the Court found that the employee committed a number of “egregious” acts that ultimately resulted in the termination of his employment, including: (1) expensing a $4,000 personal trip to Las Vegas, the cost of which included a hotel suite with three “adult film stars”; (2) fraudulently applying for health insurance; (3) forging signatures on false quitclaim deeds of defaulting timeshare owners; (4) carved out a greater-than-agreed-upon personal interest in one of his employer’s corporate entities; (5) creating an entity under his employer’s name, without his employer’s consent, taking a 20% interest in that entity for himself (the employee); and (6) making numerous sexual advances towards other employees. When the employer learned what was going on, he fired the employee and sued him for breach of fiduciary duty, fraud, legal malpractice, unlicensed practice of law, and breach of duty of loyalty.
The Trial and Appellate Courts
After a 26-day bench trial, the trial court found that the former employee breached his duty of loyalty to the employer, and committed legal malpractice and fraud. The employer was awarded $4,000 for the Las Vegas trip, over $800,000 in counsel fees and costs, and rescission of all of the employee’s ill-gotten interests in the employer’s other companies. But despite it being “difficult to imagine more egregious conduct by a corporate officer,” the trial court declined to order equitable disgorgement for the former employee’s compensation during the period of disloyalty. The trial court interpreted a prior Supreme Court decision, Cameco, Inc. v. Gedicke, as holding that “in order to compel disgorgement of a disloyal employee’s compensation, a court must first find that ‘the employee’s breach proximately caused the requested damages.’” The Appellate Division agreed with the trial court on that point and affirmed that the employer could not disgorge the compensation paid to the disloyal former employee because it could prove no actual harm.
The New Jersey Supreme Court granted certification only to address the specific question of “whether a court may remedy disgorgement of a disloyal employee’s salary to an employer that has sustained no economic damages.”
The Court reversed the courts below, holding that disgorgement is an equitable remedy within the trial court’s authority, including where a disloyal former employee’s misconduct is not tied to an economic loss suffered by the employer on account of the employee’s disloyalty. The Court directed lower courts to consider four factors to determine whether an employee breaches his/her duty of loyalty:
(1) the existence of contractual provisions relevant to the employee’s actions;
(2) the employer’s knowledge of, or agreement to, the employee’s actions;
(3) the status of the employee and his/her relationship to the employer (for example, corporate officer or director versus production line worker); and
(4) the nature of the employee’s conduct and its effect on the employer.
In effect, courts are directed to consider “the parties’ expectations of the services that the employee will perform in return for his or her compensation, as well as the ‘egregiousness’ of the misconduct that leads to the claim.”
The Court further clarified that once the employee is found to have breached the duty of loyalty, courts should decide whether disgorgement is a proper remedy by considering: “[t]he employee’s degree of responsibility and level of compensation, the number of acts of disloyalty, the extent to which those acts placed the employer’s business in jeopardy,” “the degree of planning to undermine the employer that is undertaken by the employee,” as well as “other factors” that may be relevant. And once disgorgement is found to be appropriate, the court suggested apportionment commensurate to misconduct at issue, as opposed to “wholesale disgorgement.”
Outlook for Employers
New Jersey employers scored a significant win and a meaningful tool to deter and redress a breach of an employee’s duty of loyalty. The Kaye Court addressed the circumstance of a disloyal employee who’s employment was terminated, however the analysis is certainly instructive in addressing situations with current employees. The ability to recoup some or all of a disloyal employee’s salary/compensation is certainly a powerful tool in the right circumstances, and certainly something to consider when faced with a breach of the duty of loyalty.
An employment agreement non-competition provision stated that, for 18 months after termination, the employee shall not become employed by or act “directly or indirectly, as an advisor, consultant, or salesperson for, or become financially interested, directly or indirectly, [in an entity] engaged in the business of selling flavor materials.” Earlier this month, the North Carolina Court of Appeals held that the provision was impermissibly broad. Horner Int’l Co. v. McKoy, Case No. COA 13-964 (N.C. App., Mar. 4, 2014).
Summary of the case
McKoy, a plant manager in North Carolina, was a party to an employment agreement with Horner, a manufacturer of flavor materials for use in food and tobacco products. The agreement contained non-competition and trade secret confidentiality clauses. McKoy had been in the food processing and flavor industry for decades. He resigned after six years with Horner and went to work in New Jersey for a company that manufactured food and beverage flavoring items. Horner sued him and sought preliminary injunctions with respect to both clauses. Earlier this month, the trial court’s ruling — denying the motion for an injunction with respect to the non-compete but granting the injunction motion relating to the confidentiality provision — was affirmed on appeal.
The appellate court’s rulings
The appeals panel stated that it was guided by the familiar rules that employee covenants not to compete are disfavored but are enforceable if they are no broader than necessary to protect the employer’s reasonable business interests. The non-competition covenant here had no geographic limitations and was not restricted to performance of tasks similar to those McKoy performed for Horner. Further, the covenant purported to prohibit him from associating with any company selling flavoring materials even if that company’s products did not compete with Horner’s. Finally, because he was precluded from investing “directly or indirectly” in such a company, the appellate court concluded that the non-compete was intended to prevent him even from owning shares in a mutual fund that was a Horner stockholder. For all of these reasons, the court held that the covenant exceeded permissible boundaries.
The injunction relating to the confidentiality clause, however, was upheld. North Carolina law permits injunctions for actual or threatened misappropriation of trade secrets the employee knows and has the opportunity to use or disclose. McKoy had access to Horner’s trade secrets. By averring “with great detail and specificity the information Defendant has allegedly provided to his new employer,” Horner met the “sufficient particularity” pleading standard.
Non-compete covenants must be limited in scope not only with respect to time and geography, but also concerning the activities which are prohibited. Horner teaches that an employer’s use of virtually limitless phrases such as “directly or indirectly” and “financially interested” can be risky. Also, purporting to extend the covenant to services beyond those actually performed for the employer, and locales where the employee did not work, may doom the enforceability of the non-compete. Violation of a confidentiality clause may be enjoined, however, if the employee’s access to the employer’s trade secrets is demonstrated, they are described in sufficient detail, and the likelihood the employee may exploit or divulge the confidential information is shown.
As part of our annual tradition, we are pleased to present our discussion of the top 10 developments/headlines in trade secret, computer fraud, and non-compete law for 2013. Please join us for our complimentary webinar on March 6, 2014, at 10:00 a.m. P.S.T., where we will discuss them in greater detail. As with all of our other webinars (including the 12 installments in our 2013 Trade Secrets webinar series), this webinar will be recorded and later uploaded to our Trading Secrets blog to view at your convenience.
Last year we predicted that social media would continue to generate disputes in trade secret, computer fraud, and non-compete law, as well as in privacy law. 2013 did not disappoint with significant social media decisions involving the ownership of social media accounts and “followers” and “connections,” as well as cases addressing liability or consequences for actions taken on social media, such as updating one’s status, communicating with “restricted” connections, creating fake social media accounts, or deleting one’s account during pending litigation.
We also saw more states (e.g., Arkansas, Utah, New Mexico, California, Colorado, Nevada, Michigan, New Jersey, Oregon, and Washington) enact legislation to protect employees’ “personal” social media accounts and we expect more states to follow.
The circuit split regarding the interpretation of what is unlawful access under the Computer Fraud and Abuse Act (“CFAA”) remains unresolved and another case will need to make its way up to the Supreme Court or legislation passed to clarify its scope as federal courts continue to reach differing results concerning whether employees can be held liable under for violating computer use or access policies.
There have also been several legislative efforts to modify trade secret, computer fraud, or non-compete law in various jurisdictions. Texas adopted a version of the Uniform Trade Secrets Act, leaving Massachusetts and New York as the lone holdouts. Oklahoma passed legislation expressly permitting employee non-solicit agreements. Massachusetts, Michigan, Illinois, New Jersey, Maryland, Minnesota, and Connecticut considered bills that would provide certain limitations on non-compete agreements but they were not adopted.
We expect more legislative activity in 2014, particularly regarding privacy, the scope of the CFAA, and trade secret legislation to curb foreign trade secret theft and cyber-attacks.
Finally, while the Snowden kerfuffle and NSA snooping captured the headlines in 2013, government agencies remained active, including some high profile prosecutions under the Economic Espionage Act, the release of the Obama Administration’s Strategy on Mitigating the Theft of U.S. Trade Secrets, and the National Labor Relations Board’s continued scrutiny of employers’ social media policies. We expect more government activity in this space in 2014.
Here is our listing of top developments/headlines in trade secret, computer fraud, and non-compete law for 2013 in no particular order:
1) Dust Off Those Agreements . . . Significant New Non-Compete Cases Keep Employers On Their Toes
Employers were kept on their toes with some significant non-compete decisions which forced some employers to update their agreements and onboarding/exiting practices. First, in Fifield v. Premier Dealer Services, an Illinois appellate court found that less than two years employment is inadequate consideration to enforce a non-compete against an at-will employee where no other consideration was given for the non-compete. Second, in Dawson v. Ameritox, an Alabama federal court found that a non-compete executed prior to employment was unenforceable. Next, in Corporate Tech. v. Hartnett, a Massachusetts federal court held that initiating contact was not necessary for finding solicitation in breach of a customer non-solicitation agreement. Lastly, in Assurance Data v. Malyevac, the Virginia Supreme Court found that a demurrer (i.e., a pleading challenge) should not be used to determine the enforceability of non-compete provisions but rather evidence should be introduced before making such a determination.
2) Continued Split of Authority On the Computer Fraud and Abuse Act and Efforts to Reform CFAA and Enhance Federal Trade Secret and Cybersecurity Law
Courts in Massachusetts, Minnesota, and New York joined the Ninth Circuit’s narrow reading of the CFAA and limited its applicability to pure hacking scenarios rather violations of employer computer usage or access policies. Additionally, in 2013, Representative Zoe Lofgren introduced Aaron’s Law, named after the political hackvist Aaron Swartz, to reform of the Computer Fraud and Abuse Act. Her proposed legislation would limit the CFAA to pure hacking scenarios and exclude violations of computer usage policies and internet terms of service from its scope. Lofgren also introduced legislation which would create a federal civil cause of action in federal court for trade secret misappropriation. Other legislation to prevent intellectual property theft was also introduced including the Deter Cyber Theft Act, which aims to block products that contain intellectual property stolen from U.S. companies by foreign countries from being sold in the United States. The Cyber Economic Espionage Accountability Act was also introduced and allows U.S. authorities to “punish criminals backed by China, Russia or other foreign governments for cyberspying and theft.” We expect Congress to consider similar legislation in 2014.
3) Texas Adopts Uniform Trade Secrets Act
Texas joined forty-seven other states in adopting some version of the Uniform Trade Secrets Act. Until recently, Texas common law governed misappropriation of trade secrets lawsuits in Texas. The new changes under the Texas UTSA (which we discuss in more detail here) provide protection for customer lists, the ability to recover attorneys’ fees, a presumption in favor of granting protective orders to preserve the secrecy of trade secrets during pending litigation, and that information obtained by reverse engineering does not meet the definition of a trade secret. Legislation has been introduced in Massachusetts to adopt the Act but has yet to pass. For additional information on recent trade secret and non-compete legislative updates, check out our webinar “Trade Secrets and Non-Compete Legislative Update.”
4) High Profile Prosecutions and Trials under Computer Fraud and Abuse Act and Economic Espionage Act
2013 saw several high profile prosecutions and trials under the CFAA and Economic Espionage Act. Bradley Manning, who allegedly leaked confidential government documents, to WikiLeaks, and Andrew ‘Weev’ Auernheimer, who allegedly hacked AT&T’s servers, were both convicted under the CFAA. Executive recruiter David Nosal was convicted by a San Francisco jury of violating federal trade secret laws and the CFAA and sentenced to one year and a day in federal prison. In U.S v. Jin, the Seventh Circuit upheld the conviction of a Chicago woman sentenced to four years in prison for stealing trade secrets of her employer before boarding a plane for China. For additional information on criminal liability for trade secret misappropriation, check out our webinar “The Stakes Just Got Higher: Criminal Prosecution of Trade Secret Misappropriation.”
5) More Social Media Privacy Legislation
Arkansas, Utah, New Mexico, Colorado, Nevada, Michigan, New Jersey, Oregon, and Washington all passed legislation social media privacy legislation in 2013 that prohibited employers from asking or insisting that their employees provide access to their personal social networking accounts. California extended its current social media privacy law to specify that it encompassed public employers. We expect more states to enact social media privacy legislation in 2014.
6) Continued Uncertainty on the Scope of Trade Secret Preemption
Courts have continued struggled with the scope and timing of applying preemption in trade secret cases but there is a growing movement to displace common law tort claims for the theft of information. Such claims are typically tortious interference with contract, conversion, unfair competition, and breach of fiduciary duty. In essence, plaintiffs may only be left with breach of contract and a trade secret claim for the theft of information if a jurisdiction has adopted a broad preemption perspective. Courts in western states such as Arizona, Hawaii, Nevada, Utah, and Washington have preempted “confidential information” theft claims under their respective trade secret preemption statutes.
In K.F. Jacobsen v. Gaylor, an Oregon federal court, however, found that a conversion claim for theft of confidential information was not preempted. In Triage Consulting Group v. IMA, a Pennsylvania federal court permitted the pleading of preempted claims in the alternative. Additionally, in Angelica Textile Svcs. v. Park, a California Court of Appeal found that there was no preemption of claims for breach of contract, unfair competition, conversion, or tortious interference because the claims were based on facts distinct from the trade secret claim and the conversion claim asserted the theft of tangible documents. In contrast, in Anheuser-Busch v. Clark, a California federal court found that a return of personal property claim based on the taking of “confidential, proprietary, and/or trade secret information” was preempted because there was no other basis beside trade secrets law for a property right in the taken information. For additional information on the practical impact of preemption on protecting trade secrets and litigating trade secret cases, check out our webinar “How and Why California is Different When it Comes to Trade Secrets and Non-Competes.”
7) Growing Challenge of Protecting of Information in the Cloud with Increasing Prevalence of BYOD and Online Storage
While the benefits of cloud computing are well documented, the growth of third party online data storage has facilitated the ability for rogue employees to take valuable trade secrets and other proprietary company electronic files, in the matter of minutes, if not seconds. The increasing use of mobile devices and cloud technologies by companies both large and small is likely to result in more mobile devices and online storage being relevant in litigation. A recent article in The Recorder entitled “Trade Secrets Spat Center on Cloud,” observed that the existence of cloud computing services within the workplace makes it “harder for companies to distinguish true data breaches from false alarms.”
An insightful Symantec/Ponemon study on employees’ beliefs about IP and data theft was released in 2013. It surveyed 3,317 employees in 6 countries (U.S., U.K., France, Brazil, China, South Korea). According to the survey, 1 in 3 employees move work files to file sharing apps (e.g. Drop Box). Half of employees who left/lost their jobs kept confidential information 40% plan to use confidential information at new job. The top reasons employees believe data theft acceptable: (1) does not harm the company does not strictly enforce its policies; (2) information is not secured and generally available; or (3) employee would not receive any economic gain. The results of this study serve as a reminder that employers must be vigilant to ensure that they have robust agreements and policies with their employees as well as other sound trade secret protections, including employee training and IT security, to protect their valuable trade secrets and company data before they are compromised and stolen. Employers should implement policies and agreements to restrict or clarify the use of cloud computing services for storing and sharing company data by employees. Some employers may prefer to simply block all access to such cloud computing services and document the same in their policies and agreements. For a further discussion about steps and responses companies can take when their confidential information and/or trade secrets appear, or are threatened to appear, on the Internet, check out our webinar “My Company’s Confidential Information is Posted on the Internet! What Can I Do?”
8) Continued Significance of Choice of Law and Forum Selection Provisions In Non-Compete and Trade Secret Disputes
The U.S. Supreme Court’s recent decision in Atlantic Marine v. U.S.D.C. for the W.D. of Texas appears to strengthen the enforceability of forum selection clauses as it held that courts should ordinarily transfer cases pursuant to applicable and enforceable forum selection clauses in all but the most extraordinary circumstances. While Atlantic Marine did not concern restrictive covenant agreements or the employer-employee context, it may nonetheless make it more difficult for current and/or former employees to circumvent the forum selection clauses contained in their non-compete or trade secret protection agreements. Many federal courts continue to enforce out-of-state forum selection clauses in non-compete disputes (see AJZN v. Yu and Meras Eng’r’g v. CH2O), while some courts have disregarded forum selection clauses in such disputes “in the interests of justice.” The Federal Circuit in Convolve and MIT v. Compaq and Seagate, held that information at issue lost its trade secret protection when the trade secret holder disclosed the information because it failed to comply with the confidential marking requirement set forth in a non-disclosure agreement. Accordingly, trade secret holders should be careful what their non-disclosure agreements say about trade secret protection otherwise they may lose such protection if they fail to follow such agreements.
9) Social Media Continues to Change Traditional Legal Definitions and Analyses
Social media continues to change the way we define various activities in employment, litigation, and our everyday lives. A Pennsylvania federal district court in the closely watched Eagle v. Morgan case found that a former employee was able to successfully prove her causes of action against her former employer for the theft of her LinkedIn account, but she was unable to prove damages with reasonable certainty. Recent cases in Massachusetts and Oklahoma held that social media posts, updates and communications with former customers did not violate their non-solicitation restrictive covenants with their former employer. In the litigation context, a New Jersey federal court issued sanctions against a litigant for deleting his Facebook profile, while a New York federal court allowed the FTC to effectuate service of process on foreign defendants through Facebook. The Fourth Circuit held that “liking” something on Facebook is “a form of free speech protected by the First Amendment.” Federal district courts in Nevada and New Jersey illustrated the growing trend of courts finding that individuals may lack a reasonable expectation of privacy in social media posts. For further discussion on the relationship between social media and trade secrets, check out our webinar “Employee Privacy and Social Networking: Can Your Trade Secret Survive?”
10) ITC Remains Attractive Forum to Address Trade Secret Theft
The Federal Circuit caught the attention of the ITC and trade secret litigators alike when it ruled in TianRui Group Co. v. ITC that the ITC can exercise its jurisdiction over acts of misappropriation occurring entirely in China. Since then, victims of trade secret theft by foreign entities are increasingly seeking relief from the ITC (e.g. In the Matter of Certain Rubber Resins and Processes for Manufacturing Same (Inv. No. 337-TA-849)). For valuable insight on protecting trade secrets and confidential information in China and other Asian countries, including the effective use of non-compete and non-disclosure agreements, please check out our recent webinar titled, “Trade Secret and Non-Compete Considerations in Asia.“
We thank everyone who followed us this year and we really appreciate all of your support. We also thank everyone who helped us make the ABA’s Top 100 Law Blogs list. We will continue to provide up-to-the-minute information on the latest legal trends and cases across the country, as well as important thought leadership and resource links and materials.
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Following a growing recent national trend, Judge Martini of the District Court of New Jersey issued summary judgment to Defendants Monmouth-Ocean Hospital Service Corporation (“MONOC”) and two of its senior management employees on August 20, 2013, in a claim brought by a former nurse and EMT, Deborah Ehling, who accused MONOC of retaliation and other claims.
Ehling’s claims, in part, arose from MONOC’s alleged improper access of Ehling’s private Facebook posts. Holding that MONOC did not improperly access those posts under the Federal Stored Communications Act, 18 U.S.C. §§2701-11, (“SCA”) or New Jersey’s common law invasion of privacy tort, the District Court found that MONOC’s receipt of the communications from an authorized user satisfied an exception to the SCA.
Specifically, Ehling sought damages arising out of MONOC’s viewing and discipline of Ehling for a Facebook post she made in June 2009. The post in question related to a shooting at the National Holocaust Museum in June 2009. In that Facebook post, Ehling wrote:
An 88 yr old sociopath white supremacist opened fire in the Wash D.C. Holocaust Museum this morning and killed an innocent guard (leaving children). Other guards opened fire. The 88 yr old was shot. He survived. I blame the DC paramedics. I want to say 2 things to the DC medics. 1. WHAT WERE YOU THINKING? and 2. This was your opportunity to really make a difference! WTF‼‼ And to the other guards….go to target practice. (Emphasis in original.)
Following that post, one of Ehling’s Facebook friends and another MONOC employee, Tim Ronco, provided a screenshot copy of the post to a MONOC manager, Andrew Caruso. Caruso, in turn, turned over this Facebook post (as well as others he received from Ronco) to Stacy Quagliana, one of the named defendants and MONOC’s Executive Director of Administration. After MONOC learned of the post, it temporarily suspended Ehling, with pay, and sent a memo that MONOC management was concerned that Ehling’s comment—made by a registered nurse and EMT—displayed a “deliberate disregard for patient safety.” Ehling unsuccessfully filed a complaint with the NLRB, who also found that no privacy violation occurred because MONOC was sent the post and did not acquire it on its own. Nearly three years later in February 2012, MONOC terminated Ehling, for cause, when she failed to return to work after her yearly FMLA leave time expired.
Ehling, however, argued that her termination and suspensions (other suspensions were discussed in the decision but not here) were pretext for MONOC retaliating against her for her role as president of the union within MONOC as well as her complaints to the State of New Jersey and OSHA for MONOC’s use of a particular chemical at its facility.
Rejecting Ehling’s argument that a SCA violation occurred, the Court held that, while Ehling’s non-public Facebook wall post was covered by the SCA, one of the exceptions applied. Specifically, the District Court rejected Ehling’s argument, finding that MONOC did not violate either the SCA or state law when it received paper copies of Ehling’s Facebook posts from one of Ehling’s Facebook friends.
Judge Martini’s decision is important to employers for a number of reasons. First—like other recent Federal decisions—this decision continues to recognize that a distinction exists between public and private social media posts and that an employer cannot be liable for viewing public posts or receiving private posts from a third-party. See, e.g. “Nevada District Court Finds No Reasonable Expectation of Privacy in Private Twitter Posts”, Erik B. von Zeipel, Sept. 10, 2013, https://www.tradesecretslaw.com/2013/09/articles/social-media-2/nevada-district-court-finds-no-reasonable-expectation-of-privacy-in-public-twitter-posts/, (commenting on Rosario v. Clark County School District, No. 2:13-cv-362, 2013 U.S. Dist. LEXIS 93963 (Nev. Jurisdictional. 3, 2013); see also United States v. Meregildo, 883 F. Supp. 2d 523, 525 (S.D.N.Y. 2012) (holding that Facebook posts disseminated to the public are not protected by the Fourth Amendment).
Second, the decision provides direction to employers that they may receive even private social media posts, but that they may not coerce or pressure their employees to provide such information. In offering such guidance, the court wrote: “Access is not authorized if the purported ‘authorization’ was coerced or provided under pressure.” (Op. at p. 10.) In reaching that conclusion, the court relied on another New Jersey District Court decision, Pietrylo v. Hillstone Rest. Grp., No. 06-5754, 2009 WU 3128420, at * 3 (D.N.J., Sept. 25, 2009). While the court does not explain what might constitute coercion or pressure, employers should be mindful that its acts cannot be construed as either.
Finally, when coupling this decision with the various other social media decisions handed down over the last few years, a growing national trend is apparent. Essentially, courts are holding that employees lack a reasonable expectation of privacy in public social media posts and that even some private posts might become “public” if acts are taken by others to publish those posts to the public. A dividing line seems to be forming wherein employers cannot take covert actions to discover the content of employer social media posts, but, if those posts are disseminated publicly, the employer is likely not liable for disciplining an employee for violating its code of conduct through such social media posts.
On August 29, 2013, New Jersey Governor Chris Christie signed into law Assembly bill no. 2878 (fourth reprint), which prohibits employers from asking or insisting that their employees provide access to their personal social networking accounts. New Jersey is the thirteenth state to enact some form of employee social media networking legislation.
Once the law goes into effect, New Jersey employers will no longer be able, subject to exceptions described below, to ‘request or require’ employees or job applicants to turn over their account logins, disclose account content, or sign a waiver of any rights under the statute. (Section 7 of the statute says its effective date is the ‘first day of the fourth month following enactment.’ Because the bill was signed on 8/29/13, December 1, 2013 is probably that day (December 29th will be the ‘fourth month’ after passage). At the latest, the law will take effect on January 1, 2014). Any such waiver will be void. Nor may employers discipline employees or refuse to hire applicants based on their refusal to provide account access or content, or for reporting violations. Employers found in violation of the law are subject to civil penalties of up to $1,000 for the first violation, and up to $2,500 for each subsequent violation.
The law has plenty of concessions for employers, though. Only employees’ and applicants’ “personal” accounts are off limits. The law defines such accounts as those used “exclusively for personal communications unrelated to any business purposes of the employer,” and excludes accounts that are “created, maintained, used or accessed” by employees or applicants “for business purposes of the employer or to engage in business related communications.” Thus, accounts are fair game when employers require that employees open and use them for company business, and even arguably when an employee or applicant posts anything employer-related on his/her otherwise “personal” account.
Further, the law will not prohibit employers from complying with state or federal law, including the rules of self-regulatory organizations (i.e. NASD and FINRA). Employers may also regulate work-device and work-account usage, and may also require personal account access when the employer receives information that employees have used such accounts for work-related misconduct or to store employer proprietary assets or financial data without authorization. And employers will be free to find and use any information about employees and applicants in the public domain.
Perhaps most importantly for employers, the law only allows employees to report violations to the state Department of Labor and Workforce Development, which may then file a ‘summary proceeding.’ The fines mentioned above, if levied, go to the state, not to the complaining employees or applicants. Governor Christie conditionally vetoed the original version of the law, which allowed employees and applicants to file lawsuits for their own damages, back pay, benefits, injunctions, attorneys’ fees, and costs. The governor struck that provision without specific comment (he only commented on the exceptions for required access), and the Assembly and Senate both unanimously passed the version without the lawsuit provisions.
New Jersey’s limited remedies provisions are not uncommon. Of the thirteen states with social networking privacy laws, only Oregon’s and Washington’s statutes authorize civil lawsuits without capping damages. Other states either cap lawsuit damages at no more than $1,000, or do not authorize lawsuits, instead limiting remedies to complaints with state agencies and fairly nominal penalties. And New Jersey’s narrow definition of “personal” accounts is also consistent with most other states’ laws, which limit their reach to personal accounts either expressly or by implication.
We will keep you posted with other updates on the state and federal social-networking privacy front.
A New Jersey district court judge recently declined to dismiss trade secret claims against the Weather Channel, finding that the plaintiff Events Media Network Inc. (“EMNI”) had alleged sufficient facts to state a claim of trade secret misappropriation under the Georgia Trade Secrets Act.
The parties first entered into a licensing agreement in the spring of 2008. EMNI agreed that it would provide the Weather Channel with access to a continually updated database of information, including schedules for events and attractions throughout the United States. This information was compiled based on publicly available information. The Weather Channel was given broad rights to use and distribute this information, however, “EMNI retained proprietary rights to the information and imposed confidentiality requirements on its use.” Following the expiration of the agreement in 2011, some of these confidentiality provisions survived, and EMNI filed suit, alleging that the Weather Channel had misappropriated the information, and used it for purposes beyond those permitted by the contract, such as building maps and creating weather products.
The Weather Channel filed a motion to dismiss the claims, alleging that EMNI was “attempting to expand a simple contract dispute into a tort action for conversion and misappropriation of trade secrets.” Defendants also argued that the fact that the information at issue was publicly available and could be displayed publicly under the terms of the licensing agreement demonstrated that it was not a trade secret. The court, however, found otherwise, finding the pleadings sufficiently alleged a violation of the Georgia Trade Secrets Act to survive a motion to dismiss. Here, the plaintiff allegedly earned a “competitive advantage from compiling publicly available information,” and thus, “those public domain elements may be considered to have been integrated into a finished product that is deserving of trade secret protection.” The court found that EMBI had sufficiently alleged that it maintained the confidentiality of a database of information it had licensed to the Weather Channel, and had placed clear limits on the Weather Channel’s dissemination of EMBI’s information.
Defendants in trade secret litigation should use caution in relying on the defense that information is not a trade secret because it is publicly available. While this defense may be applicable in many cases, where the information is compiled into a finished product which provides the plaintiff with a competitive advantage, the court may be wary of this defense (at least made on the pleadings).
In addition, the case raises the issue of whether the terms of a written contract can establish the elements of a trade secret. Here, the parties contractually agreed the information supplied by EMNI was proprietary. EMNI used that provision to argue the Weather Channel had conceded that the information was proprietary, and the court agreed. As John Marsh points out in his own blog post on the case, “[i]n written agreements negotiated between sophisticated commercial parties, courts will frequently defer to the language of the agreement.” This is consistent with the recent Convolve case in which the Federal Circuit found that the parties’ negotiated non-disclosure language served to override any governing state law related to trade secret misappropriation. We will continue to keep you posted with any material developments in this case.
The U.S. Attorney’s Office in New Jersey recently charged a former employee with stealing trade secrets from a New Jersey medical technology company.
The former employee, an Indian national, worked in a group at his former employer responsible for the manufacture of pen injectors and pre-fillable syringes. He resigned from the company last month, and in the weeks leading up to his resignation, “allegedly downloaded 8,000 files containing step-by-step assembly instructions and invoices for equipment to create self-administered disposable pens.” According to the company’s own internal probe, he also “forwarded about 60 documents containing trade secrets from his work email account to one of his personal email accounts.” He also allegedly called in sick the day before he resigned, but he was “busily downloading” company files using his work laptop, the complaint says.
Company representatives noticed the suspicious downloads and the authorities were alerted. The FBI then executed a search warrant for his hotel room, where he was staying prior to returning to India. The FBI seized hard drives, computer storage devices, and computers. The employee also informed agents of his plans to return to India in the next couple days. The agents also discovered evidence that he may have intended to use the trade secrets in future employment, including “a résumé and an ‘entrepreneurial finance book.’” According to FBI Agent Laurie A. Allen, “The numerous documents containing BD trade-secret information downloaded by defendant Maniar collectively constitute a veritable tool-kit for mass producing the disposable pen,” Allen said. This stolen information could be used to set up a competing business.
The U.S. Attorney’s Office has charged the former employee with theft of trade secrets for his own economic benefit, and if convicted, he could face up to 10 years in prison and a $250,000 fine. The employee has also been sued by his former employer in civil court for trade secret misappropriation in violation of New Jersey’s Trade Secrets Act. The criminal case against the employee was temporarily placed on hold by Magistrate Judge Steven Mannion on Thursday June 12, as plea negotiations are currently in progress.
The case highlights the growing use of criminal prosecution as a tool to dissuade theft of trade secrets. The case also highlights the importance of monitoring employee access to secure company databases and limiting access to important data to a need know basis. Furthermore, companies should consider using additional preventive means to prohibit employees from stealing trade secrets, such as configuring computers to restrict access to external devices, 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 and either highlights or restricts the amount of data that can be sent out by a user. In an era in which data is becoming increasingly portable, companies must increase their vigilance in monitoring the use and export of their data and trade secrets.
We will continue to keep you posted as this case progresses.